Here's the entire text of the Q&A from Motorola's (ticker: MOT) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we'll incorporate your corrections. And please note: we have paid to have this conference call transcribed, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.
The prepared remarks are here.
Operator Thank you sir. At this time if anybody does have any questions you may press “*” 1 on your touchtone phone, you will be asked to record your name prior to asking a question, again please “*” 1 to ask a question. If your question has already been asked you may press *2 to withdraw your question again that’s “*” 1 for any questions.
Edward Neider from Charter Equity Research
Q - Edward Neider: Thank you very much, great quarter clearly it’s throwing off a lot of cash on a basis this year and if it becomes a passage you actually went ahead _____ in other business, that most are going to be sitting on substantial cash reserves and generating a lot per quarter. I know you get an aversion in the past to larger acquisition or any mergers, what are your expectations to a repatriate that money to the shareholders or to use it for some other purposes rather than just accumulation?
A – Edward Zander: I don’t we think we’ve changed our position here, we are certainly pleased for a company that two years ago struggled to get net cash and operating cash was something that came in before I got here focused on, it’s good to see us beginning our operations to generate this cash. We are as you know as an aggressive stock buyback which we will continue to do, we will continue to use it for some of these smaller acquisitions we have been doing and you will see those from time to time and we will continue depending on whether with this happens over the next year, always continue to evaluate our options but right now I think it is the stock buyback and any small acquisition that we will do.
A - David Devonshire: We also mentioned that we were looking at repurchasing a billion dollars worth of debt in the first half of 2006.
Q - Edward Schneider: Thank you so much.
Operator: Michael Lingin rom Credit Suisse First Boston
Q - Michael Lingin: Thank you. Could we get an update on where we are on the first GSMA tender of those 6 million units in terms of how much of that is shipped and then just looking into the fourth quarter, how we should expect that unfolding into just general kind of regional mix in the handset business, what trend should we expect in Q4?
A – Ron Derricks: From a GSMA perspective, this is Ron Derricks Mobile Devices, from the GSMA tender one we’ve shipped about half of the tender one to-date of the six million units we’ve shipped just about 3 million of them, we believe between Q4 and Q1 of next year we would execute the remainder of phase I, we will be beginning working on the phase II part of that. Second part of the question was regionally how do we expect we will do, I really feel right across the globe, that we will have a market share growth as well as continued profitability in all of the five markets that we speak about.
Operator: Dale Armstrong from Smith Barney
Q-Armstrong: Thank you very much, congratulations on the quarter. Going in to the fourth quarter I see a lot of things that have actually helped your margins within the handset business, continued volume momentum, the new product shipping as well as additional RAZR shipment, but what are the couple of things that you guys look at that could stand upward momentum in terms of margins within that business in Q4?
A – Dan Maloney: That’s a good question, that’s what we can talk about a lot, there are so many moving parts here, so many geographies so many economic issues, you see oil prices, you see disasters, you can put down atleast ten. Now our job is to rank them and stack them and put weighted averages on them, I will tell you that they are very consistent on this for almost the better part of two years now in that we wanted to continue to invest and we did a commitment and we said we are moving up to our targets of 13% to 15% and we talked about every business here moving in a direction before towards that number Ron and his business has done an outstanding job in getting here but we are as equally excited about the many investments we are making in R&D, in field expansion in brand equity and other things so we have to play that a lot within a quarter and we think in Q4 we have a pretty good product lineup, the markets look pretty good, but we are also planning some more wild products in 2006.
Q- Smith Barney: Congratulations again.
Operator: Christine Amacart from _____
Q - Christine Amacart: Thank you, I wanted to ask the question on the networks group, you guided down sequentially on operating margins due to favorable customer mix. Can you give us an idea of how much of the iDEN business grew within the network systems and to the extent that you would quantify it, we want you to quantify what percent of that business is next half?
A – Dan Maloney: As far as the sales of iDEN infrastructure in the third quarter Christine, iDEN infrastructure sales did increase from the third quarter of 2004 so that business continues to grow, it has had growth virtually every quarter so far in 2005 versus the comparable quarter of 2004. We don’t discuss the relative profitability of one technology versus another in that business or in any other business.
A – Edward Zander: Yeah, I will add to that, I know where you are going in thinking but this business is not lumpy but you do have the ability to get some big contracts during quarters and you can ship the margin, and in addition AG’s team is also focused on cost reduction and supply chain and margin and everything else. We are just giving, I mean, I would love to see him to do it again but we don’t want to give you where we think the business is, we want to gain market share, we want to invest here. We think the more normal is 12% to 15% range and the guidance for Q4 total as a company factors that in. So I think that’s irrespective of iDEN or anything else that’s where I think the business should be and that’s where we planned it.
Operator: Ehud Feblum from JP Morgan.
Q - Ehud Feblum: Okay thanks. Just clarification in my question, my clarification is, David you mentioned the $91 million reorganization charges, did you mentioned how much of that came from Cog versus Apex?
A – David Devnoshire : I could handle that, and then you can go on with the other question there, relative to that question, about $34 million of it was in Cogs and the remainder was of SG&A.
Q – Ehud Feblum: Great thanks that. Okay so the real question is on the handsets, and you made a comment that the low-end handsets were up 50% I believe quarter over quarter. How do you define a low-end handset is that below $100 below $40 and when you look at the marginal increase from 10.3 to 11%, how much of that came from these low-end handsets, the volume of these low-end handsets, actually making the margin of this low-end handsets better so therefore raising the margin in that group of handsets versus how of much it came from just more high-end handset like RAZRs etc., that have had phenomenally better margin naturally, do you know what I am saying? How is make shift percentage how much of that particular category of low-end in fact improving in terms of income of margin?
A – Edward Zander: _____
A – Brown: Well thank you, I think if you, look at Q3 and you look at kind of what we call growth in the low-end, we generally define low-end as below $50 and we look at that in Q3 and it was roughly balanced with the growth in the high end and the growth in the low end and both of them added bringing a wee percent up the seven tenth of a point that was driven.
A – Edward Zander: The key here is that we observed a lot of growth in the very low end and we were still able to improve the operating margin in the segment. That is the thing that the investor should understand
A – Brown: And I think the other thing, that I continued to harp on when I was in India and if I can get the cold low end going in India, I am going get the high end going in India, there is a lot of people in India first, and there is a lot of people with enough money, that go buy RAZRs in India. So we need presence there and that’s what we are doing and we think we can sell as many RAZRs as we could probably make for India if we just get on the street, get into the retail channel so, we saw that in China back over the last 10 years and I think we are going see that in places like Russia and South America, Latin America and also in India.
Operator: Scott Coleman from Morgan Stanley
Q - Scott Coleman: Great thanks guys, just could you clarify the operating margin for handsets where you guiding for growth, are you guiding for often the 10-7 or the 11% operating margin? And second if you could give us a little more detail about the nature of these chargers and what you might expect on a go forward basis?
A – Ron Derrick: This is Ron Derrick, I will answer the first one, when we articulate that we are going grow share and profitability the profitability is often the 11% number and the market share is year-over-year.
Operator: Scott could you repeat the last part of your question?
A – Edward Zander: I know what it was, we don’t plan every quarter reorganization of things of lines, we do think within our budgets so my staff the four general managers actually do a lot of things within the quarter that you don’t see, retargeting, redeploying some people and a lot of things go on during the quarter and as Stew Reed pointed out during July, we do have to do some very high level manufacturing procurement, rationalization which does involve labor and does involve people and lot of what you see divided between the four business was centered around some of that work. No will that ever happen again? I don’t know. Will some of that be covered within in the normal business? We certainly tried to do that but once in a while you are going to have to do what we did this quarter.
Operator: John Duker from Harris
Q – John: Thank you, question on your enterprise product portfolio in the mobile device segment, and is the queue still on track for first quarter of ’06 and there wasn’t a lot of discussion in your comments on mobile devices, I am just wondering do you see upside in market share or operating profit potential in ‘06 as you release new enterprise centric devices?
A – Ron Derrick: This is Ron Derrick, I will answer the first one on the enterprise device. I am actually sitting here using a queue on the call and its working quite well so I am very confident in it’s ability to ship in Q1 of 2006. For 2006, I am going to give basically the same guidance I’ve given every quarter for the last four quarters and we expect to grow faster in the market and continue to drive our percent up versus the previous quarter in the previous year.
A – Gregory Brown: This is Greg Brown, this is a little additional color in addition to the mobile office queue product plans, we continue to expand our efforts in the other key verticals and product segments around the mobile computing and asset visibility as well as private radio networks and radio products. We continue to have very good growth in the enterprise segment and both private networks and radio products we also just introduced the HT700 Windows mobile based platform which gets Motorola into the commercial off the shelf rugged mobile computing market as opposed more of the custom courier business that we’ve traditionally served and we are very excited about that.
Operator: _____ from CIBC World Markets
Q -: Hi guys, congratulations on a great quarter, talking about the supply chain that you just mentioned. Two questions on the action, will you tell us of the 5-6 areas that you mentioned as areas for improvement during your analyst David, can you tell us where is most of the progress still left to be made and second obviously volumes are continuing to grow specially into the next quarter, can you tell us if you have experienced any component shortages anywhere or do you anticipate any as you ramp up for the holiday season?
A – Edward Zander: I’ll answer the second one than first, we don’t see any components shortages there is lot of stuff in the press but I‘ve seen and I have in fact I just check with Stew before the call to make sure I had the facts right, he hasn’t seen anything from the suppliers at this point of time. The first question was where we are working on, and I think next time we will probably have him in the call here too, its still more the same we do have manufacturing around the world but we still have to rationalize, there are certain things in the wrong places and so on and so forth, the second area we are working on is supplier both on supplier procurement when it comes to cost, but equally if not more important on quality. And as we improve the quality in this company not only do we get more customers satisfaction which leads to more sales but we do get cost out of the systems, we spend a lot of time Ron and I as a matter of fact, even with Dane and Greg pulling apart the gross margin line of this company and if you do it its addition of course to the manufacturing cost get into display of stuff and get into the quality stuff and you have ways to improve into those three areas, so I think it’s a continuing thing and it will be here for a long time and we are not the world’s best supply chain yet, we did increase probably we did not mention it, the inventory returns this past quarter I think to, on a four quarter trailing over a nine full year. So we made great progress, not great progress but good progress in the first time, we ought to be double digits in that area, so we know the metrics and I think actually Stew outlined this for everyone at the call and we are just going keep knocking at this thing.
A – Unknown Speaker: I think that is right and one more clarification here, the re-organization charge that we took some of those actions were implemented in the third quarter others have been announced publicly to employees but are not yet fully implemented and will be implemented in the fourth quarter and into the early part of 2006. So simply because we took the charge doesn’t mean all of the actions have been completely finalized in terms of implementation at this point. That’s an ongoing thing we will do.
Operator: Nat Horsment from Morsen Cabage
Q -: Yeah hi and thank you. Gross margins down a little bit company wide, but I was hoping to know what the gross margin trends were within the handset unit on standalone basis? Thanks.
A: Earnings I want to mention before I turn it on to Ron is gross margin was actually relatively flat quarter-over-quarter. You saw it year-over-year but if you look quarter-over-quarter it is relatively flat and that’s even with mobile devices forming a bigger percentage of our business so you can see, if you look at Q2 to 03 the cost savings we are doing the quality improvements we are doing and the kind of thing Ron is doing in generating more margin dollars is kind of taking place because again we did hold gross margins well, I think within 10th of a percent flat quarter-over-quarter.
A- Ron: Yeah we not share the gross margin in business like this, in order to create the additional wee percent, the 11%. I will tell you that we use all levers in order to be all to get to the 11% way.
Operator: Brian Motor from Duestche Bank
Q -: Hi, I might have a follow on question depending on your answer. Can you guys kind of talk about what you might think unit volumes will be on handsets in this financial quarter, can we expect them to be in the mid-to-high forties and what do you instruct with ASP trends, given the mix you have, could they be flat-to-up sequentially?
A - When I look at it, I rate it to be in two pieces and from a overall hand perspective we expect from the nice growth basically sequentially Q3 to Q4 which is traditionally been in the side of this business, we’ve already said we don’t expect to lose share and we expect to gain share from Q3 to Q4. I think if you look at those two numbers it gives you a relatively good idea of where we think we are going to be from a unit perspective and I believe ASP’s will be roughly flat as we grow both in the high end and in the low end.
One of the reasons we and with some of my competitors, I don’t, again I just have done this, this is just a forecast or ____ and the units because if you know it is ramping this quarter and the numbers were 10 to 20 units less during the quarter, having people changing in your forecast everyday, and the _____ goes up and whatever so, I never know, we think we know what consumers are doing and we think we know what this quarter foresees about but just as we were all pleasantly surprised in Q3, the ____ I think was bigger and our market share grew accordingly bigger all we know is whatever the tam is we think we can get more of it. So I will see what I can do, I wish I knew exactly how many consumers going to buy a mobile device this quarter.
Q -: Given that your revenue guidance seems to be a bit ahead of ____ if it has above the range, given what you said on handsets, would your EPS guidance perhaps be considered conservative?
A - My staff doesn’t think so.
A - : The key here is some thing we have already discussed. The key here is the sequential operating margin decline we expect in the network business, which is a bit above 17% in Q3 and which we think will go into the 12 to 15% range in Q4. The other aspect of this we are trying to carefully point out to people relative to our guidance was that the Q3 tax rate excluding the significant items in our press release was 36%, which I think is a little higher than what most people were modeling for Q3 and we told you to use the same tax rates for Q4 and finally our shares outstanding were a little bit higher than most people were modeling for Q3 and we again told you to use the similar amount of outstanding shares for Q4 as well. So when you take those three factors into account, those are important elements to the basis of our guidance for Q4, the most important of which of course is the operating margin declines sequentially in networks.
Operator: Brantley Thompson from Goldman Sachs.
Q -: I was wondering if you could give us an idea of when we should expect, I guess the timing of the impact of some of the supply chain initiatives that you have got in 2006, you talked about a cup on basis points and then kind of maybe contacts those as how much of that is margin improvement which is actually expected to come from that versus general improvement volumes market share and next these types of things? Thanks
A - : Before we start it Brandly I wish I could articulate that, I think you saw some of benefits this quarter and I think the nearly a whether it’s a 11 _____(12 –6 for the whole company had all of those ingredients for the revenue, the product portfolio but also kind of the work that Stew is doing and Mike Finger we don’t talk much about, these driving quality initiatives in this company, its number one, its on every employees mind right now. All of that we see, we see it in cost of product or quality numbers we see it in our supplier mixes, in terms of the purchasing power. And I think we are going to see it in every quarter now and in every quarter in 2006, but 6,7,8,9 I think, we think we have got a lot of work to do and can continue to improve quality in supply chain and continue to build great products. I wish I could break it all down for you, but I am not sure we do it to the level, although we do have a good understanding about gross margin and our profitability and Ron for example or Greg who is sitting here or Dan who is on the phone feed that into their _____.
Operator: Tao Liani from Merrill Lynch
Q -: Hi, I am wondering if you can give a little more clarity on the low end side of the business, when you speak about low end, should we think about it as sort of $40 phones all of it, what’s the proportion of $40 and may be $60, $70 phones, what is the size of low-end and the percentage of total shipment just little bit more clarity on sort of the composition of this shipment? Thanks.
A – Ed Zander: We don’t really want to get into that too much now. I think we have given enough about the low end and I don’t want to give my competition too much worth on what we are doing what here. We don’t even think about the low end certainly GSMA, when Ron presents to me his product portfolio, he has different price points but again just I was in the middle east or in Europe, Eastern Europe this past couple of weeks and in India just a few weeks before that and I am just a believer in you have got to be in the geographies and you have got to sell across the product line in any great company has to have all the various price points and if you do it right you can end up with, I think the US still has low end markets, I think there are a lot of people I bump into that want a low cost handset to make telephone calls so I think with what Ron has showed me anyway and what the company looks out, we have got a balanced portfolio across the border that we can continue to do and I think there was a lot of not skepticism but a lot of questions about this quarter with GSMA shipping in volumes whether we could grow operating earnings. We grew volumes as you can see the 387 and some of that volume was in the low end and yet we produced the kind of OE we have not seen for a long time around here. So, I think we are going to continue the PT driving in and balancing it and I think we are designing for it. I think I said a year ago when our market share was flat we were not ready to go in the low end in these markets cause we did not have the products designed. I think mobile device team has built now products that we can make money at the low end. I also think, I will say this and the only nice thing I will say about number one. Our number one competitor has shown has that you can have a three big positions in those spaces and make money and I always look at the leader in the industry and I say to myself, if we see it we can demonstrate what you can do with low end, Ron don’t you think?
A- Ron: The only thing I will add to it and it really echoes what Ed said, the only way to grow market share while doing it more profitably in the number one priority industry shows this quarter after quarter is you must have a balance portfolio from low end to low mid, to mid to premiums sphere. We are clearly executing that strategy and we believe it is a requirement in order to do the things that we say we are going to do in Q4 as well in 2006.
Operator: Maynor Ham from the UBS
Q -: Thank you, some what activities have picked up significantly in the industry relating for the government business and in particular around hurricane Katrina. Can you talk about how big of an incremental opportunity this could be and when those benefits might start to kick in? Can we see you know the acceleration in double digits year over year growth with these opportunities? Kind of what we have seen historically? Thank you.
A- : Yeah in Q3 obliviously with what happen down in the gulf coast we will Motorola corporate wired mobilize pretty quickly, our focus was on reconstruction, restoration and refresh and it was modest volumes in Q3 do I think if highlights the importance of an industrial strength, prior to radio system absolutely end to end, I do believe and we believe that will have generally stable both influence in Q4 and inter 06 because if highlights the critical major intermission, critical communications, so obviously we see at the as contributing to our momentum in Q4 and Q4 will be very good for the government business also recognizing the government public safety traditionally is very seasonally strong in Q4, we have had enough check in the federal volume and also on a order spaces as they finish the federal fiscal year in September and the state local business will remain strong as well, as well so grown over all home line security demand worldwide.
Q - Dane Maloney any comments to me on business in the gulf area since hurricane.
A – Dane Maloney I think we’ve certainly had a lot of discussions with our customers as they look to work on the rebuilding of their networks and we’ve just begun to see a little bit of that in this October over the coming quarters we continue to see Next question please.
Operator: The next qs will come from Voitac who is the leverage from Varys times
Q -: thank you very much, just one if could have a clarification and then second qs the clarification was on, and you mentioned that the shares outstanding should have some flat next quarter, how should we think about, you have a pretty big buy backs, should we start building and assuming shares outstanding declining because of the buy backs, how should we think about the shares outstanding and then more related the qs was kind on 3G, any optics on with at the market you guys will be cautious in rightly zone for 3G demand, what’s the latest part, how do you see the market kind of playing over next year, how big of a drive it is or not?
A let me cover the shares outstanding qs, we were reporting to every quarter upside and the issues providing that there are two influences that can create shares, what shares at in the given quarter, thrice a year we’ve a employee stock purchase program, that winds up seeing shares issue to employees from money that this we tell from their pay checks month by month through the year and we issue new shares to employees in the fourth quarter and in the second quarter when that occurs and we also have general stock option grants, those grants invest over four years. All we can include in the fully diluted share calculation is the vested portion of each stock option grant. Those vesting periods occur every May. So what occurred here will occur each May over the next couple of years is a another element of previous grant scat invested even though no new option this were issued and that two has an influence on me on number of option issues that we are forced to use our in calculations. So I think we will try give you a better look at this quarter like quarters we go forward and when let you know is in as far in advance as we can what the share changes will be.
I will just add a little bit of that net that it is a weighted average over a 12-month period. So you will not see the full impact of the share that we purchased that we began for until its run is course over 12 months and so you will see an overall aggregate gradual decline overtime.
A This is the last question we this is wrong from a UMTS size of the market in Q4 let me member of and such prescribe this it is a relatively small number of hand set in the overall number of shippings and we are going to make it is still hard to call the size of that hand. I believe they will hold our share in that part the market independent of how large that can is but when I look at Q3 to Q4 growth. I see moderate moderate high UMTS growth specifically in the European market. The next question please.
Here next question comes from Tim Long from Banc of America, the line is open.
Q: Thank you just a question on a Japan actually like hood. Do you talk a little bit now you have some handsets over there that are kind of work to way in to the 3G network just give us a little update on the progress layer in the outlook in and on a related note _____ question, but if I could ask another royalty question. Is there something with the move to 3 G in Japan that has been a benefit or will continue to be a benefit for Motorola on the intellectual property revenue side given that the some of those companies rely on Motorola for GSM in WCDNA type of pack Thank you.
A: I am sure from a Japanese market perspective we went ahead and we launched the first UMTS wifi device in the M1 1000. We are still seeing a very brisk sell and sell through and we are also working very closely we though come how on HSDTA on type a devices and HSUPA devices number quick core development perspective and we continue to support the Vodafone KK globally as a part of the Vodafone group I think we have the pretty exciting road map for 2006 and want to avail this important FAM. Although our business is extremely strong with KDDI on the infrastructure side we haven’t participated inside of the handset this is inside of KDDI CDMA one X and or deal perspective. As from a royalty perspective from the understanding that I have of the question we see no additional benefit for lack of benefits or selling additional phones into the UMTS market in Japan.
We have time for one final question.
Operator: Your final question will come from Hassan Imen from _____ line is open.
Q -: Thanks my question is do with the head count reduction of the charges you announced I think grossly amounts to 2000 employees. So the question is it going to be a net decline to head count going forward or do we hirer in other divisions and if it is not a long term decline to head count can we still expect the benefit to operating margins as that because it is coming out of the inefficient supply change. Thanks.
A: We are on in a I don’t was in Europe when all that got ((indiscernible))01:05:59 in United States surprise by other 1900 number and all its number is equally we added in the quarter some number close to that head counts relatively flat has been some time that’s what you see the revenue from ((indiscernible)) going up so we haven’t improved deficiency in management unfortunately and nobody even do by one on involuntary basis of employees but we are doing this part of our supply chain and in some cases that might be smaller things and need to go do, but we had lot of injury in United States a lot of good marking people, a lot of good sales and they try to bid some GNA and more lowest to the right and around the world so if you look at the overall head count its well pleased but same and its got a move that direction so we didn’t the more reduced by what the number was 1900, but we added in the quarter two and other areas itself. I _____ even got that message how the way probably we should come across.
All of those people had left the company yet I did that’s the several year back that’s going to encourage stages over the next couple of quarters with some degrees as well.
Do you thinking that more efficient with the current net can we have we may of there in some places help again efficiency as well drive why now.
Mission most simply by revenue from play which we showed you a progress. During this call we made a number of forward-looking statements or any statements are any statements that are not a still _____. These forward looking statements are based on the current expectations of Motorola and that we can know sure that such expectations were improved to be correct. Such forward looking statements include that are not limited to our comments and answers relating to the following topics.
Guidance from Motorola sales and earnings per share for the 4th quarter 2005. Motorola is expected to effective catch rate in the 4th quarter 2005 and for 2006. Expectations regarding the volume and impact of our stock we purchase program. Motorola is expected stock option is expensive in 2006. Expecting gains from the favorable investments in 2006. Feature sales profitability operating earnings, operating margin, ever sound prices in market share for each of Motorola segments. Expectations from Motorola’s future operating margin and various factors in its improvements. Expected timing for the enhancement launch in shipment is new products. The sales impact of pricing of products availability is for materials and use available cash reserves. 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 us to _____ and we found in the _____ press release on page 72 various Motorola’s 2004 annual report and Form 10-K and the Motorola’s other SEC filings. Thank you all for participating this afternoon’s conference call.
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