Executives
Dean Lindroth - Corporate VP ofIR
Ed Zander - Chairman and CEO
Tom Meredith - CFO
Greg Brown - President and COO
Analysts
Jim Suva - Citigroup
Phil Cusick - Bear Stearns
Edward Snyder - Charter EquityResearch
Mark Sue - RBC Capital Markets
Brant Thompson - Goldman Sachs
Stan Kovler - Merrill Lynch
Ittai Kidron - CIBC World Markets
Brian Modoff - Deutsche Bank
Mathew Hoffman - Cowen
Jeff Kvaal - Lehman Brothers
Richard Windsor - Nomura
Maynard Um - UBS
Tavis McCourt - Morgan Keegan
Paul Sagawa - Bernstein
Tim Long - Banc of AmericaSecurities
Ehud Gelblum - JP Morgan
David Wong - Wachovia
Motorola Inc. (MOT) Q3 2007 Earnings Call October 25, 2007 7:30 AM ET
Operator
Good morning, and thank you forholding. Welcome to Motorola's Third Quarter 2007 earnings conference call.Today's call is being recorded. If you have any objections, please disconnectat this time. After this teleconference, the presentation material andadditional financial tables will be posted on Motorola's Investor Relationswebsite. In addition, a replay of this conference call will be availableapproximately three hours after the conclusion of this call over the Internetthrough Motorola's investor relations website. The website address iswww.motorola.com/investor.
At this time, all participantshave been placed in a listen-only mode and the floor will be open for yourquestions following the presentation.
I would now like to introduce Mr.Dean Lindroth Corporate Vice President of Investor Relations. Mr. Lindroth, youmay begin your conference.
Dean Lindroth
Thank you, and good morning. Welcometo Motorola's third quarter results conference call. A number offorward-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 ofMotorola and there can be no assurance that such expectations will prove to becorrect. Because forward-looking statements involve risk and uncertainties,Motorola's actual results could differ materially from these statements.Information about factors that could cause, and in some cases have caused, suchdifferences can be found in this morning's earnings release on pages 16 through24 in Item 1A of Motorola's 2006 annual report on Form 10-K and in other SECfilings.
This presentation is being madeon the 25th of October 2007.The content of this presentation contains time sensitive information that isaccurate only as of the time thereof. If any portion of this presentation isrebroadcast, retransmitted or redistributed at a later date, Motorola will notbe reviewing or updating the material that is contained herein.
With that, I would like to turnthe call to Ed Zander, Chairman and CEO.
Ed Zander
Thanks, Dean, and good morningeveryone. Thanks to all of you for getting up a little earlier for our calltoday. With me today are Greg Brown, President and Chief Operating Officer, andTom Meredith, Chief Financial Officer. We are here to review our third quarterresults and provide perspectives on the fourth quarter.
Our third quarter can becharacterized by one word, progress. We improved our earnings and cash flowsignificantly compared to the second quarter and made substantial improvementsin all key metrics in mobile devices.
We also further strengthened our categoryleadership in key emerging technologies and markets, such as broadband video,WiMAX end-to-end architecture, and Government & Public Safety andEnterprise Mobility segments.
Q3 was about execution, doingwhat we said we were going to do. And we also recognized there is a lot morework to do. Our management team is committed to returning the company to ourfinancial targets, as outlined during the September Analysts' Meeting.
Some of the quarter specificsinclude, and Tom and Greg will give further color in just a few minutes, salesof $8.8 billion. On a GAAP basis, we were profitable, at $0.02 per share, fromcontinuing operations. Earnings per share excluding highlighted items was $0.06per share, up from $0.02 per share last quarter, and operating cash flowimproved significantly to over $340 million.
Also, excluding highlighteditems, gross margin percentage for the company improved sequentially andoperating cost declined sequentially.
In Mobile Devices, we began tomove in the right direction. We increased units, sales, and gross marginpercentage while lowering operating expenses. These improvements resulted insignificantly lower operating loss.
Home and Networks Mobility andEnterprise Mobility Solutions continue to see strong underlying demand fortheir products and technologies.
Finally, we announced the sale ofour embedded communications computing business to Emerson for $350 million incash.
Overall, we are optimistic aboutthe future of our business. Seamless mobility and the mobile and fixedbroadband Internet vision, we have articulated over the past few years arebeginning to take hold in markets around the world.
Furthermore, our key R&Dinvestments, in broadband video distribution, IP and IPTV, mobile products andsolutions for the emerging enterprise space, advanced technologies such asvideo and IP networks for public safety applications worldwide, and nextgeneration mobile devices with application services-enriched experiences,together with the many acquisitions over the past few years, will allow us tocompete aggressively in the marketplace in years ahead.
In the near-term though, ourpriorities remain the same, continue to innovate, maintain operational discipline,and execute quarter-after-quarter.
Before we move on to discuss thedetailed financials, I want to thank our employees around the world for alltheir hard work and dedication. Together we are making progress, but it's justa start.
Now, I'll turn the call over toTom to cover the financial results.
Tom Meredith
Thanks, Ed. In the quarter, saleswere $8.8 billion, down 17% versus last year and up 1% as compared to thesecond quarter. The year-on-year sales decline is all attributable to theMobile Devices business segment.
On a GAAP basis, the company had earningsfrom continuing operations of $0.02 per share compared to earnings fromcontinuing operations of $0.29 per share last year.
The third quarter GAAP resultsinclude highlighted items of $0.04 per share for charges associated with ourannounced workforce reductions and a writedown of intangible assets. Earningsper share excluding highlighted items was $0.06 per share.
My next several comments will alsoexclude highlighted items.
Gross margin percentage for thecompany increased sequentially by 80 basis points. This increase is primarily aresult of the sequential gross margin improvement in Mobile Devices.
Operating expenses for thecompany declined by approximately $100 million compared to the second quarter,as a result of progress on our restructuring efforts. Looking by business, OpExcame down sequentially in all segments. The increase in gross margin percentageand improvement in operating expenses, resulted in an operating profit of $169million up from the $32 million operating loss reported last quarter.
Below the line, total otherincome was $18 million compared to $54 million last quarter. We now expect anannual effective tax rate of 26% due to certain tax credits and the currentforecasted mix of profits and losses in our various geographies. This resultedin a tax rate of 21.4% in the quarter. We expect next year to return to a more pivotaleffective tax rate of 35% to 36%.
Operating cash flow was approximately$342 million in the quarter and positive in all three business segments. Thisreflects improving operating results in Mobile Devices and a seven dayimprovement in our overall cash conversion cycle. We ended the quarter with netcash of $4.2 billion, down slightly compared to last quarter due largely toacquisitions, share repurchases, payment of dividends and capital expenditures.
In the quarter, we used $115million to repurchase approximately 7 million shares at an average cost of$16.90 per share. To-date, approximately $7.2 billion of our $11.5 billionshare repurchase program has been completed. We've now repurchasedapproximately 351 million shares which represents approximately 14% of theoutstanding shares in May 2005 when we initiated our first share repurchaseprogram.
Our cash conversion cycle atquarter end was 43 days, compared to 50 days in the second quarter. We are infact making progress. The seven day reduction was led by improvement in MobileDevices which ended the third quarter at 37 days, 12 days better than lastquarter.
Enterprise Mobility Solutions was47 days, a six day improvement. So, without any huge structural changes, with abetter focus, better alignment of our objectives and priorities, growingmomentum and discipline out in the field, we've made notable progress overall.As for the inventory for our company, it was essentially flat compared to thesecond quarter and days inventory on hand or DIOs remained essentiallyunchanged at 43 days, while on accounts payable, BPOs showed a slightimprovement. We can and will do better. We currently have a small team of handpicked leaders driving our ongoing efforts to improve the cash conversion cycleacross all three business segments. I'm personally very encouraged, as are Edand Greg, by the progress, we've made thus far particularly in Mobile Devices.
And we will get help from allcorners of our company. I was traveling in Asia and Latin America during the last few months, visiting factories andcustomers, and talking about the cash conversion cycle. I'm more convinced nowthan ever the opportunities are there for the taking. We do see a clear path toreaching a cash conversion cycle of 20 to 30 days by the end of next year. Thiswill be predicated on better receivable management and process, progress oninventory and value chain initiatives, and better terms from our supply base.
I'll turn now to our annualizedreturn on invested capital, which we talked about last quarter. I've beentalking about this metric and its importance, as I have been meeting withemployees the past several months. More people are getting message everyday. Asyou know, this is a 12-month rolling average calculation. So, despitesequential improvement in operating results, the metric as of the end of thequarter is down and will do so until we begin to show improving year-on-yearresults.
We are taking number of actionswhich will enable ROIC improvement, one of which is our cost reductionprograms. With respect to our workforce actions, I will share with you afterthe acquisition of Symbol and Good in January. We had approximately 72,000employees. At the end of September, we had approximately 67,000 employees. Thereduction reflects our workforce actions which are substantially complete and naturalattrition another organization will continue. Operating expenses are, asmentioned earlier, coming down. So, we are clearly moving in the rightdirection. And as we said at our analysts' meeting, we expect total operatingexpense to decline approximately $500 million from 2007 to 2008.
Moving onto our outlook for thefourth quarter, we are encouraged by progress in Mobile Devices as compared toprior quarters. We expect continued improvement in the fourth quarter. So,while Stu and his team are focused on improving the portfolio, lowering thebreakeven and making our cost structure more variable, these improvements donot come overnight or easily. Much remains to be done.
We expect fourth quarter earningsper share from continuing operations to be in the range of $0.12 to $0.14. Ourfocus continues to be on the quality of our earnings across all of our businessunits, including tight controls over operating expenses.
Now, I'll pass the call over toGreg who will review business operations in more detail and provide additionalcolor on fourth quarter expectations for each of our businesses
Greg Brown
Tom, thanks. In Mobile Devices,sales for the quarter were $4.5 billion on volume of 37.2 million units and aslight sequential increase in ASPs. Our estimated market share in the quarterwas about 13%. Excluding highlighted items, the operating loss in the quarterwas $138 million, a significant improvement over both Q1 and Q2 results.
North Americaand Latin America continue to be our largest regions,accounting for 49% and 22% of sales respectively. We are the market leader inboth of these regions. EMEA and Asia-Pac, both of which remain challenging,represent 14% and 15% of sales respectively.
Channel inventory levels continuedto improve and have essentially returned in aggregate to levels that we wouldconsider normal. Compared to last quarter, gross margin percentage improved,again, as a result of our new product offerings, which are collectively runningat higher margins than the mature products in the portfolio. Operating expenseswere lower due to progress in our restructuring program maintaining tightcontrol over expenses and prioritizing investments.
With respect to our portfolioenhancement efforts, we continue to make further progress on our software andsilicon initiatives. Earlier this month, we announced the purchase of a 50%stake in UIQ Technologies from Sony Ericsson. This will strengthen UIQ as anopen application delivery platform for smartphones, and enable us to expand theMobile Devices portfolio in the multimedia segment and regain traction in Europein particular. This is part of our strategy to build an open softwaredevelopment environment and ecosystem for mobile devices.
Another important part of oursoftware initiative relates to our ongoing Linux/Java efforts. In the quarter,we launched the Moto Magix, our Linux mobile platform, as well as MotoDevSuiteStudio, which includes multiplatform tools aimed at developers.
In WiMAX, we're building on ourleadership position. With the introduction of our chipset modem solution, thisultra high speed chip is optimized for both flip size and low powerconsumption, and will enable compelling WiMAX mobile devices next year.
Moving onto the products in thefeature phone segment, RAZR and KRZR continued to be top sellers globally. Wesold over 8 million RAZRs, bringing us to a total of now over 110 millionRAZRs, and in the quarter nearly 3 million KRZRs. RAZR-2 has begun shipping toall regions and technologies. It's off to a great start meeting the needs ofthe demanding feature phones users and accounted for over 900,000 units in thequarter. We launched IC602, our first Linux/Java dual-mode ID CDMA phone and,just recently we announced the RAZR2 luxury edition in time for the holidayselling season.
In the multimedia category, a prioritycategory going forward, we expanded the ROKRZ6 music phone franchise andstarted shipping the CDMA Z6M in Latin America and North America, and in the USthe Z6TV our first media flow device. The Z8 utilizing the UIQ interface is nowalso available and shipping throughout Europe and in Africa.And also, the MING product continues to sell well in Asia.And most recently we announced the GSM Edge Moto U9 music device.
In the productivity category, theCDMA Q9M product is doing well with Verizon North America. The HSDPA Q9H isavailable throughout Europe, and is also available in Africaand Australia,and will begin shipping in North America in the fourthquarter.
In mass market, the W375 and W220devices are among our top sellers. And we just announced seven additional Wseries products that encompass everyday communications needs with SMS,Bluetooth, FM Radio, cameras, games and other features at affordable pricepoints.
So to recap, the operationalchanges we've made in Mobile Devices are beginning to yield results and we'remaking progress. We improved gross margin percentage, further improved stock inchannel inventory, enhanced our product portfolio, and made progress on thesoftware silicon front. Stu and his team are actively working to address thetop priorities at hand and we expect to see more progress going forward.
Looking ahead, the market remainsstrong. Our top priority in the near term remains the same, enhancing our productportfolio and improving profitability. You've seen several enhancementsalready, RAZR2s, ROKRs, Qs, the additions to the W series lineup plus a fewothers as we head into the fourth quarter. Our brand remains strong, and ourcustomers want us to be successful.
But keep in mind, we're not wherewe need to be in all product segments in the overall market. In the emergingmarkets, we will continue to compete with our current products and get moreaggressive when we have low-cost solutions that will result in profitablegrowth moving forward.
In application services, we willcontinue to actively work with third-party developers and content providersincluding Yahoo, Microsoft, Google and others to develop an ecosystem andservice delivery platform that will deliver rich experiences to consumers.
For the fourth quarter, we expectto see sequential improvements in both the top and bottom line for MobileDevices.
Looking at Home and NetworksMobility, sales for the segments were $2.4 billion up approximately 6% versus lastyear and down approximately 7% versus the second quarter. Excluding highlighteditems, operating margin decline to 6.9% versus 10.2% last year and 8.1% in thesecond quarter.
As we anticipated third quartersales in the home business declined sequentially to $950 million and operatingmargins were under some near-term pressure due to the acceleration of purchasesin Q1 and Q2 related to the US FCC mandate on separable security. It'simportant to note, however, that the underlying demand remain strong and salesincreased 18% year-over-year reflecting growing demand for high-definition andvideo-on-demand services.
Regionally, sales in North America increased 16% compared to last year and accounted for 83%of total home sales. Sales outside North America were up27%.
In digital entertainment, wemaintained our market leadership position with unit volume in the quarter of2.7 million devices of which HD DDR was approximately 40% and IP was 25%. Ascompared to year ago, unit growth is up 11%, driven by high-end devices in IPset-tops. IP continues to gain momentum as demonstrated by the shipment of our2 million IP set top box device coming just five months after reaching the 1million mark. This was led not only by US operators but also strength we're seeingin Europe.
Modem shipments were 2.5 millionunits, up 6% from last year, all driven by products from our Netopiaacquisition.
On the product front, weintroduced the DSR 6000 series receivers/transcoders enabling programmers todistribute content in MPEG4 HD format while enabling service providers todeliver either MPEG4 or MPEG2 in either standard definition or hi-def formats.
And, finally, we strengthened ourvideo core portfolio by closing two acquisitions, Modulus Video and TerianCommunications. We also closed on Leapstone Systems, our leading communicationssoftware developer. Key video solution wins in the quarter included HBO, Starz Entertainment,and BT. In addition, Comcast recently selected us for the rollout of theirswitched digital video solution.
Turning to cellular networks, theindustry is highly competitive and continues to be challenging. We do notexpect this environment to change anytime soon. Our overall network sales wereflat, sequentially, with product mix essentially unchanged. As we've talkedabout before, pricing and margin pressures in GSM and the declining level of iDENinfrastructure sales in the UScontinue to put pressure on operating margin.
In mobile broadband, we conductedthe world's first WiMAX 802.16e mobile handoff during the WiMAX WorldConference in Chicago just a fewweeks ago. This successful demonstration proved to customers, media andanalysts that this technology works and it will provide a truly uniqueexperience to consumers around the world, including web browsing, voice overIP, and video streaming. We were also awarded WiMAX contracts to deploy oursolution at Bahrainand Uganda, andjust weeks ago, when the largest WiMAX network deployment in Taiwan.
Looking at the fourth quarter forthe home and network mobility segment, we expect sequentially higher sales withslight improvements in operating margin. This reflects continued strongyear-over-year demand for home and flat to slightly lower network sales.
Now, let's take a look atEnterprise Mobility Solutions. Sales for Enterprise Mobility Solutions werenearly 2 billion, flat sequentially and up as compared to last year largely dueto the Symbol acquisition. Sales from Symbol grew again in the double digitrange year-over-year. Excluding highlighted items, operating margin for thissegment was 17.2%, as compared to 15.7% in the second quarter.
Government and Public Safety hadanother solid quarter with sales up approximately 8% year-over-year andcontinued strong operating margin levels. North Americaaccounted for 62% of sales, with continued strong demand for our digitalsystems solutions. In EMEA which represented 24% of sales, momentum in TETRAcontinued with additional nationwide rewards.
In Asia-Pac and Latin America, 8%, and 6% respectively, we launched the Moto Turboproduct, our dual-mode digital 2-way communications platform which integratesvoice and data. We've also realized benefits from the 800 MHz rebanding, withsolid year-on-year growth in both services and equipment, and are encouraged bythe growing interest in next generation public safety systems here in the US.
In Enterprise Mobility, salesincreased slightly compared to the second quarter to over 570 million which istypically a seasonally weaker quarter. Operating margin declined sequentially,largely due to costs associated with the ongoing integration efforts. The Americasaccounted for 65% of sales in the quarter, while EMEA and Asia-Pac represented28% and 7% respectively. We'd solid sales results in North Americadue to opportunities in retail, transportation and logistics and fieldmobility. Europe and Asia-Pac had strong year over yearperformance also driven by retail and field mobility, in addition tohealthcare.
The overall integration continuesto go well, and Motorola's brand recognition is beginning to broadenopportunities for Symbol's Enterpriseproduct offerings. On the product side, we shipped our one million MC9000, theindustry's best-selling rugged mobile computer. We also began shipping theMC17, a new handheld device aimed at retail in-store applications for enhancedpersonal shopping experience.
With respect to GoodTechnologies, we recently announced the availability of the Good mobilemessaging 5.0 release which makes mobile e-mail more personalized andproductive while enhancing IP controls. Our roadmap integration and planningcontinues. We currently expect that the Good software will be integrated intomany of our rugged mobile computing products, including the MC35 and MC70 bythe end of year. This will enhance the customer experience, and usercapabilities, by providing push email and other enterprise grade services.Looking ahead to the fourth quarter, we expect Enterprise Mobility Solutionssegment to deliver sequentially higher sales and continued double digitoperating margin.
In closing, as we look overall,third quarter operating performance, we're seeing results from the changeswe've implemented. We'll continue the momentum and drive further improvementsin the coming quarter. With continued execution, our global brand and healthymarket trends across key businesses, we're well positioned for the long-term.
And with that I'll turn it backover to Dean.
Dean Lindroth
Thanks, Greg. Before we begintaking questions, I'd like to remind callers to limit themselves to onequestion so that we can accommodate as many participants as possible. Operator,you can now provide our callers with instructions on how to ask a question.
Question-and-Answer Session
Operator
(Operator Instructions). Thank you.Our first question is from Jim Suva with Citigroup.
Jim Suva - Citigroup
Thank you very much and a bigcongratulations to you all. I'm very impressed, especially with the moredisciplined nature of the cost controls and as we look forward into say Q4, Iguess my question is like on the SG&A line, and with those cost controlsand more disciplined nature, are we expecting continuing decrease in SG&Aor we are at kind of a level now of a lot of those initiatives kicking in andyou need to have SG&A to support your higher growth? How should we thinkabout that disciplined nature?
Tom Meredith
This is Tom, we're going tocontinue to have very tight control on operating expense as I mentioned duringthe call, and we're really not going to provide additional guidance on grossmargins or OpEx at this point. And much like I said on the call last quarter, Iknow many of you are just dying for us to give you sort of the ASP guidance, unitguidance, and gross margin guidance, but we're just not going to be in theposition on this call or any time off this call in the near term to give thatkind of detailed guidance right now.
I think Greg provided a lot ofcolor, as did Ed, on the kinds of decisions we're taking in our focal pointsand I trust that we'll be continuing to, as we get further out in time on theQ4 call and in the Q1 call, we'll be giving more clarity around our goingforward guidance.
Jim Suva - Citigroup
Okay, then maybe just a quickclarification, on the actual Q3, results then, for some of these initiativesand disciplines, I would imagine that they were definitely not involved for theentire full quarter, therefore, one could expect to see continued improvement.Would that be a fair statement?
Tom Meredith
You're asking me to give you moreguidance on OpEx, than I'm prepared to go into right now.
Jim Suva - Citigroup
Okay, great, thank you. Andagain, congratulations.
Dean Lindroth
Thanks, next question please?
Operator
Thank you. Your next question isfrom Phil Cusick with Bear Stearns.
Phil Cusick - Bear Stearns
Hey, guys. I'm going to asksomething similar, but you've been losing share in a bunch of regions aroundthe world. And I wondered if you expect to gain a little bit of share back in thefourth quarter or whether that little bit of drop is going to continue for awhile?
Ed Zander
This is Ed. First of all, I thinkyou're referring to Mobile Devices. We actually think we gained share andagain, I think the revenue of the other businesses are certainly significantnow, so I think Government and Public Safety, when we look to those numbers andin the connected home business and some of our WiMAX stuff we're doing, and inthe Enterprise Mobility are all share gains. The mobile device situation isvery simple, I think at the beginning of the year, we said the first thing weneed to do is to get profitability and I think profitability eventually drivesmarket share. So, we're focused on profitability, and quality of earnings,lowering our cost structure, getting new products out and we'll continue to dothat.
In some areas of the world, like North America, Latin America, we still maintainour number one position. As Greg said, we're challenged in some of these othergeographies. But we're trying to dial this in and start to get Stu and his teamto think about top line and market share, but first we really need to baselinethe profitability.
Greg you want to--?
Greg Brown
Yeah, clearly we're focused onimproving profitability and improving the product portfolio. In parallel, whenwe do that, market share follows, we're obviously not giving any forecastedguidance for Q4 in market share. In North America and Latin America we regained our number one, position. In India,some of the emerging markets we lost share as well as some other spots in Asia-Pac.
Ed Zander
The goal is profitable marketshare. That was the goal in 2004 and it's the goal today. We have to work onthat first word first. And that is Profitable. And we get that; as we saw back in2004, the market share comes. We can invest and do the kinds of things we wantedto do. So, it's profitable market share. Greg and Stu were driving the profitside along with Tom.
Phil Cusick - Bear Stearns
If I can follow-up, the inventorybeing back to normal it is just great after a pretty tough time, but is thatback to normal across the board or is there still some pockets of issues?
Greg Brown
Yeah. I think in aggregate it hasreturned to what we'd characterize as normal. There are certain areas that canimprove, we always think we can improve on stock and channel inventory, that'sthe mentality we have going forward.
Phil Cusick - Bear Stearns
Thanks, guys.
Dean Lindroth
Thanks, next question, please?
Operator
Thank you. Your next question isfrom Edward Snyder with Charter Equity Research.
Edward Snyder - Charter Equity Research
Thanks a lot. And niceimprovement in most of your metrics. Regarding Mobile Devices, you've gotseveral models out that are selling particularly well in the RAZR platform, butwhen can we expect a brand new platform? Stu spoke to this at the Analyst Day,where you were going back to more platforming forms but were still basing a lotof your product on the RAZR platform. And it would seem that real market sharegains and further enhancement of profitability for your phones isn't going tocome until we see something completely new. Any idea? Can we look forward tothis in sometime in 2008 or do you think it will take longer than that?
Greg Brown
Actually as we mentioned, we'repleased with RAZR2 sales out of the gate with 900,000 units in the quarter andnow being made available in all technologies and geographies. The W series hasbeen refreshed as well. We like that. It'll address more of the mass marketopportunities for us. And candidly the Q being made available here in North America, with the HSDPA Q9H and the Q9M with Verizon in North America targeted toward the personal music oriented consumers. Soit's solid.
Stu did reference at thefinancial analysts meeting, a richer experience multimedia phone. I wouldsimply say, stay tuned it's a very important category for us. It's right foropportunity, particularly in Europe and it's anaddressable market historically that we haven't played in. So, you'll seethings develop over time.
Edward Snyder - Charter Equity Research
I think by your comments then,you're pleased with RAZR2 sales and the W series et cetera, but you're notlooking to move particularly quickly away from this platform in the next--?
Ed Zander
The RAZR2 is, it's based on acertain architecture platform that gives derivative products. The W is anindependent low end platform that is not RAZR2 base and here is Q of course andneither is the Z series, which I think Greg was talking about, and that is themultimedia platform based on UIQ.
There's four platforms in thecompany right now, and there's derivatives based off that. I think you'll see anumber of products, over the next year in those four different platforms with,as we said, different alternative chip sets which is going to allow us toexpand dramatically in the 3G space, when we talked about that at the analystmeeting. And with the addition of UIQ and some of the work we're doing onLinux/Java to bring in the rich multimedia application services type products thatwe need at the high end.
So, what was going on, is the lowend with W we're doing cost controls and supply chain and ability to compete inthese emerging markets in 2008, with a better cost structure, and at the highend with UIQ and Z series to compete in the multimedia segment. So, I think you'llsee that unveil in the four buckets we talked about.
We are pleased with RAZR2s. Ithink we did almost 1 million units. I would say that was done in 80 days. Imust say that the popular product everybody talks about today, also did about 1million units in 90 days. So, we're pretty excited about additional acceptancewith the RAZR2 product.
Edward Snyder - Charter Equity Research
Thank you.
Dean Lindroth
Thanks, next question, please
Operator
Thank you. Your next question isMr. Mark Sue with RBC Capital Markets.
Mark Sue - RBC Capital Markets
Ed, it's encouraging, but yourplans of V-shaped recovery in Mobile Devices is looking more like a U, whichhas significant implications, some of which are forward moving competitive targetsand loosening carrier relationships. Any thoughts of accelerating the processat Motorola as it relates to product development so that it becomes more of a collaborativeeffort between you and the carriers?
Ed Zander
I think you have a good point. Ido believe that the recovery in this business, in my four years, you are watchingwhat happened back in 2004 can be quick with good product execution. And thehard thing is to pick the inflection point. I think what we needed to do in thelast six months is to put the operational discipline and execution back intoMobile Devices, so it's not dependent on a one-hit wonder such as RAZR, eventhough everybody would like to have that. I think we're doing that. I think wehave got now the kind of discipline you see in the results, improvements in theresults.
We work with Verizon, for example,on the Q9 music device. We are working with a number of our carriers onspecific products. Greg and I spent last week in Europe andit was refreshing talking to all of the major big carriers there. I think wewere absent at the first part of 2007 and we had a great number of engagementswith them on products and marketing programs. And I think as we get into 2008,I'm kind of with you. I think the recovery, we have to start pushing therecovery, at the rate that we think the market's growing and stay tuned.
Mark Sue - RBC Capital Markets
Okay. So, a U with a small point,but not a W?
Ed Zander
It better not be.
Mark Sue - RBC Capital Markets
Thanks, gentlemen. Good luck.
Dean Lindroth
Thanks, Mark. Next questionplease?
Operator
Thank you, your next question isfrom Brant Thompson with Goldman Sachs.
Brant Thompson - Goldman Sachs
Hi. Just two quick things. I waswondering if there was any incremental color on the other line and in terms of what'scomposed in that other line. This represents a significant loss. It's obviouslychanged a lot over the last couple years. And then secondly, on the grossmargin improvement on the handset, obviously, you have a lot of new products thatare coming into the mix that are helping that -- but could you give us anycolor as to where we are with regard to the mix of the older products and versussome of the newer and whether or not the gross margin improvement is being seenbecause you've taken and really improved gross margins in your lower end phonesversus higher end phones. Any other color you could offer on the dynamic ofthat improvement would be great. Thank you.
Tom Meredith
Brant, this is Tom. In thecontext of the other line, what you have to understand is, and we recognizethat this line obviously makes modelling our company somewhat difficult becauseit does move around a lot. But included in that line is stock compensation andintangible amortization, and periodically you have some other items that hitit. But you should look to that line to be somewhere in the neighborhood of$200 million to $225 million per quarter.
Greg Brown
Brant, on the gross margin in Q3,we did have a significantly higher contribution from newer products as youwould expect. They come with commensurate higher gross margins. That's part ofthe story. We also improved gross margins on some of the other piece as of theportfolio due to supply chain efficiencies and material cost take down andlastly the element is pricing where we've been more disciplined in pricing andchannel rationalization globally. So, it's gross margin improvement in some ofthe traditional product portfolio, some of the new product, as well as pricing.So, that's kind of the composite story.
Dean Lindroth
Thanks. Next question, please?
Operator
Thank you, your next question isfrom Tal Liani with Merrill Lynch.
Stan Kovler - Merrill Lynch
It's actually Stan Kovler callingin for Tal.
I just have a question on theoutlook in general. Wanted to understand if, just in general terms, Iunderstand you're not giving guidance per line item, if you would characterizethe drivers for the sequential EPS improvement more top-line driven oroperating driven?
Tom Meredith
This is Tom, let me do it bysegment. In terms of Mobile Devices, we do see, sequentially seeing our top-linego up, revenue units up and improvement in our bottom line and home andnetworks, it'll also be sequentially up. And that's largely going to be drivenby a rebound in home and networks will be flat to slightly down.
We do anticipate slightimprovement in the bottom line in Home and Networks also driven largely byhome. And in our Enterprise Mobility group, I'd say up sequentially on the top-linein both, and again, both groups had very strong performance this last quarter.But keep in mind, the year-over-year comps are going to be tough, especially inthe Government and Public Safety business because of USPS. And we do expectdouble digit OE in E&S. So, that's sort of the some of the various segmentguidance.
Stan Kovler - Merrill Lynch
Thanks. If I just follow-upquestion on the enterprise and mobility business. Federal government was notreally mentioned as far as the USas driving the strength, and your comments signal some caution there. Should wethink about the business there being driven more by Symbol and by the sales ofthe new terminal products you have?
Greg Brown
Yeah, actually the overall demandtrends in both traditional public safety and Symbol are very strong. As Tomjust referenced, I think some of the year-over-year comps, as it relates topublic safety specifically a little bit more difficult because of the US PostalService contract embedded in the comparative base year of last year. But Iwould actually say both businesses are going strong; as we mentioned Symbol hasexceeded our expectations from an integration standpoint, a product developmentstandpoint and a financial standpoint. But both businesses are doing very well.
Dean Lindroth
Thank you, next question please.
Operator
Thank you. Your next question isfrom with Ittai Kidron with CIBC World Markets.
Ittai Kidron - CIBC World Markets
Thank you very much. I have tosay, looking at the numbers, I am actually somewhat disappointed. It looks likea lot of the upside in the fourth quarter is really just tax-driven Tom, canyou comment on the progress of turning around the Mobile Devices unit from anoperating margin standpoint? It looks like you made progress, but still farfrom reaching breakeven with ASPs flat quarter-over-quarter. When will we seeASPs move up by dollars and not cents? And what is the level of volume or ASP thatyou see as required in order to breakeven in that business?
Greg Brown
Yeah, this is Greg. Just from aMobile Devices standpoint, ASP has increased a little bit to $121 for Q3. Ithink, I would just reorient and tell you that we are very, very focused onprofitability and margin. ASPs move at any point in time and are a reflectionof the aggregate portfolio, but we're driving to clearly improve profitabilityand product refresh. While we did lose money, we cut the operating loss in halfand we are absolutely with urgency and intensity focused on improvingprofitability as quickly as possible. The overall guidance as we reflected is$0.12 to $0.14 within the line items we wouldn't, we wouldn't give that breakdown.
Just on gross margin percentage,we have sequentially improved it, for I think three quarters in a row and also forthree quarters in a row in Mobile Devices. So, it's a very regimenteddisciplined stair step. And we're working hard on all levers, pricing, newproduct efficiencies, new product, higher gross margin, richer experiences andthat's the cadence of what we're going to continue to drive from an overallportfolio standpoint over time.
Ittai Kidron - CIBC World Markets
Yet a follow-up on that. It seemslike the pace of improvement of your gross margin is growing significantly.
And can you comment in yourhandset portfolio, if you take the volume that you shipped this quarter, whatwas the percentage of handsets, that in your opinion are within the standardsyou want your handset business to be from a margin standpoint? What is thenumber of handsets that are below par right now?
Tom Meredith
Actually we're not going to getinto that level of detail on the call and I have to go back to your openingcomment about the progress that we are projecting in the current quarter, Q4being largely driven by tax. I guess I'd like to invite you to take thatoffline with the IR community. Because for example, in the third quarter, justto be very clear, we had an obviously favorable tax rate largely driven by thevagaries of how you calculate effective tax rates, but that was offset by essentiallythe delta in interest income in sequential terms which was down significantlyquarter-over-quarter. So, there was a penny offset and penny upside, and that'sjust the way it is. I'm perplexed by your question, and I would invite you totake that offline.
Ed Zander
When you go offline, I'd alsolike to pick up the gross margin. Because actually Q3 was actually a very goodimprovement over Q2 versus Q1, so we're actually doing even better there too. So,both of issues, I think, we just getting at the numbers straight or at leasttalk to you. Thanks, Next question.
Dean Lindroth
Next question.
Operator
Thank you. Your next question isfrom Brian Modoff with Deutsche Bank.
Brian Modoff - Deutsche Bank
Hi, guys. Couple of questions. First,can you talk a little bit about your 3G product line? What do you see comingthere? Obviously it's very important to regaining share, particularly in Europewhen you talk about some of the new phones you have coming in that area. Andthen give us a view of what you see the overall industry looking like goinginto Q4. What do you see inventory levels looking like across the regions? Howdo you see demand shaping up in Q4, overall? Thanks.
Greg Brown
So, from a demand perspective inQ4, obviously we see the industry growing, generally double digit plus. We areintroducing more 3G products. Particularly RAZR2s both on EBDO in the CDMAcommunity as well as on the HSDPA side. Obviously it's important in an area anda product portfolio; we'll continue to focus on and stock and channelinventory, in aggregate, as we mentioned continues to improve very nicely andwe'll attack all regions as aggressively as we can, for alignment withcustomers as well as the cash conversion cycle benefits associated with that.
Ed Zander
Two other things on 3G also theQ9, HSDPA are all 3G products that are now shipping in Europe and will be here shippingin United States very shortly. And the other thing is, it is a priorityobviously, we talked about it at the analyst meeting, in terms of, also the Z8,also which is in Europe and which will have subsequent product lines are all3G-based, too. And then, finally, of course one of the biggest priorities inthose two shop is a lower-cost 3G product and I think we talked about whatwe're doing in that space at the analyst meeting, and stay tuned for that in2008.
Dean Lindroth
Thank you, next question please?
Operator
Thank you your next question isfrom Matthew Hoffman with Cowen.
Mathew Hoffman - Cowen
Yeah, thanks. Two of Motorola'scompetitors have commented on production capacity issues and componentshortages that affected their results somewhat in 3Q. Is Motorola running intoany of the same shortages right now? Is there anything out there that mightprevent the company from actually meeting demand in 4Q?
Second, housekeeper for Tom, Iwas hoping you could allocate the $0.04 of charges by line on the incomestatement, help us with the pro forma reconciliation? Thanks.
Greg Brown
Yeah, on the first point, we donot see supply issues affecting us in Q4 at this point.
Tom Meredith
And actually, the breakout on thehighlighted items is on our website. If you just double-click on that flash onthe press release, you'll get to it quickly.
Mathew Hoffman - Cowen
Alright, thanks guys.
Dean Lindroth
Thank you, next question, please.
Operator
Thank you. Your next question isfrom Jeff Kvaal with Lehman Brothers.
Jeff Kvaal - Lehman Brothers
Thanks very much, team. Tom, Iwas wondering if you wouldn't mind enlightening us little bit about your planson the share repurchase program, things have slowed here a little bit, andthere's some room to go? Thank you.
Tom Meredith
On share repurchases, as I hadmentioned, we have about $4.4 billion remaining on the $11 plus billion program.And we intend to essentially continue pursuing that buyback. And we are goingto do that over time. I'm not really going to announce how aggressive we'regoing to be, but obviously as our cash flow situation improves, we obviouslyare therefore positioned to be flexible and how aggressive we'll go after that.I will highlight, since you raise the comment, that we obviously have alsolong-term debt maturing and watch that space in coming weeks because weobviously are going to have to deal with that.
Dean Lindroth
Alright, thank you, next questionplease?
Operator
Thank you. Your next question isfrom Richard Windsor with Nomura.
Richard Windsor - Nomura
Hi, good afternoon, thanks. Justa quick one really, I wonder if you could talk about in Mobile Devices, whatwas the impact of any intellectual property royalties, both in terms of revenuesand perhaps on profitability?
Tom Meredith
Actually, we're not going getinto that level of detail. I will say one comment, on the year-over-yearbusiness it was a negative affect in the quarter.
Richard Windsor - Nomura
Okay, thank you.
Dean Lindroth
Thank you, next question please?
Operator
Your next question is from withMaynard Um with UBS.
Maynard Um - UBS
Hi. Thank you, clarification onthe question if I could. On the clarification, was there any favorable currencyimpact to Mobile Devices in ASPs? And then the question -- on the changes atSprint and the potential impact to WiMAX from a mobile device and networkstandpoint, does that push it out further beyond 2008? Thanks.
Tom Meredith
Obviously, as the dollarweakened, our revenues and therefore, to the extent we had net profit from anybusiness segments, we were favorably affected by the currency. Beyond that, Iguess I'd invite you to go offline and talk. It depends on the level ofgranularity and detail you want with our IR team. And what was the second partof the question?
Ed Zander
Yeah. In terms of Sprint,obviously, we don't see any point at this juncture with any strategic changesas a result of their WiMAX initiative. We're in close touch and aligned withSprint's senior management and have reason to believe that Barry West'sorganization continues to move forward, given the 2.5 spectrum that they have andthe strategic importance of WiMAX over time. So, we're still approaching thisbusiness as usual.
Maynard Um - UBS
Great. Thank you.
Operator
Thank you. Your next question isfrom Tavis McCourt from Morgan Keegan.
Tavis McCourt - Morgan Keegan
Hi, guys, thanks. It's Tavis. Ihad a question on the sequential revenue trend, geographically, in the mobilebusiness. It sounds like it was up in Latin America.Wondering if you could give us a sense of sequentially, was it up or down and arethe three other regions, US, EMEA, and Asia?
Greg Brown
Yeah. Again, I don't think wecomment on sequential revenue trends, but just to go back to my point on marketshare in North America, we remained number one. In Latin America to your point we gained share. EMEA was effectively flatand Asia-Pac specifically was down slightly and I would attribute that to Indiaand some of the emerging markets and just a little bit to China.
Tavis McCourt - Morgan Keegan
And what is the timingexpectation on being able to get more aggressive in the emerging markets with alower cost platform?
Greg Brown
We're in the emerging marketstoday. And we have the feature phone product portfolio that's beginning to gettraction and I think it's very important to note that these markets are very,very important to Motorola. They're critical. And that's, as you know, wherethe majority of the growth is. That said, we'll always evaluateopportunistically in the very lower tier and other areas, and we have a more competitivecost structures to compete in some segments of the markets where we're notcompeting today.
Ed Zander
I think the good news, and just littlebit of color, I was in Europe last week, and actually,in addition to the big countries, got into places like Egypt,Greece and Israel.The encouraging thing for me was that our brand was strong, we had goodpartners there. Given the right products, what we deliver, I think there'sopportunity. It was pretty encouraging to see the kind of momentum that we havebuilt-up over the past several years. So, we got to work on products, and Wseries is a good start. I think, Stu is working on some other products thatgive us the profitability. With the channels we have, the brand we have, Ithink we can regain some of that emerging market share with our retailers anddistributors in some of these countries.
Tavis McCourt - Morgan Keegan
Great, thanks a lot.
Dean Lindroth
Thank you. Next question please.
Operator
Your next question is from PaulSagawa with Bernstein.
Paul Sagawa - Bernstein
Hi, actually I have a question of-- you've had some remaining channel inventory clearance, activities in thequarter. Can you give a bit of a sense of what the costs of that have been? Howmuch inventory did you, channel inventory did come down this quarter? So justsort of idea comparatively as look forward in a clear inventory, channelinventory at normal levels range, what kind of benefits you'll derive from thatin your general --
Tom Meredith
Paul, this is Tom. At thefinancial analyst meeting you may recall that I posted a chart that talkedabout our value chain in Mobile Devices.
Paul Sagawa - Bernstein
Yes.
Tom Meredith
And from the time the very firstcomponent was bought from one of our suppliers through the time the productexited a channel or distributor operator was roughly 5.5 months, which we feltwas entirely too long relative to what we believe our competition is posting inthat same vein. And we talked about four to six operating margin points beingavailable to us to shrink that. So, if that's the question, then I'd say Iwould stick with that number as a guidepost for what it cost us to have channelinventory.
Ed Zander
I think the second thing is, justmore qualitative. I was in Chinalast month, just working now with these distributors to sell our new productsand to get them energized about taking some of the new things we've introducedand go to market with it. So, it's back to where we were a while ago in termsof go to market and creating value propositions for the consumers out there.So, I think Tom characterized the financial thing. I'm as equally excited aboutthe qualitative aspects of having the inventory addressed in the channels.
Dean Lindroth
Next question, please?
Operator
Your next question is from TimLong with Banc of America.
Tim Long - Banc of America Securities
Thank you. If I could just getback to the handset side and pricing strategy. You did talk a little bit abouta potential shift in strategy back towards market share gains when you get backto profitability. Could you just give us a little more color there? Does thatmean as soon as the business turns profitable or when you get to a base levelof profitability, say 5% or so? And at that point, how does the model start tolook? Do we start to look at more unit growth being offset by back to the ASPsdeclining a few percent a quarter on a sequential basis? Just a little color onstrategy and how you're looking at that. Thank you.
Greg Brown
Tim, we are not changingstrategy. Our strategy is profitable growth and product portfolio enhancementin parallel. What we were saying was you have got to make money and our focusis on making money. And commensurately, as we do that and get the flow throughand the operating leverage of the model as well as continue to expand theproduct portfolio into segments that we've been traditionally limited inplaying, those two things in combination should allow us to grow share overtime. That's what we're talking about.
Tim Long - Banc of America Securities
Okay, then maybe just clarify thecomment I think that Ed made that soon you're going to get Stu to focus more onthe market share gain, maybe just clarify what that meant exactly?
Ed Zander
Look, I think all of ourbusinesses and outside of maybe some of the cellular infrastructure are growth businesses.That's the exciting part that energizes us every day. We have marketplaces,where there's government worldwide, and enterprise, and home and mobile devicesthat are growing. This management team is focused obviously on profitablemarket share. We want to be number one in every place we have with goodprofitability. I think the emerging markets were and still are an opportunityto grow market share and grow it profitability.
I think we got carried away alittle bit at the end of last year. And I think we set back a program now tointroduce products there with distribution channels that are going to beprofitable. So, I don't think market share means you have less profitability.In fact, I think it's the other way around, if you do it right.
So, I think what we are seeing isin marketplaces like Europe and the United States, we have rich experiences, focus onthe right products with the right profitability, and in the emerging markets dothe same. So, I didn't want to imply that we're going to change any strategyonce the situation improves here. It's just the other way around. Moredisciplined about continuing with profitable market share is the way to look atour strategy.
Tim Long - Banc of America Securities
Okay. Thank you.
Dean Lindroth
Next question, please.
Operator
Your next question is from EhudGelblum with JP Morgan.
Ehud Gelblum - JP Morgan
Hi. Thank you very much. First,just a clarification on the market and then question about platforming, if Icould. It sounds like your estimate of the market, given where you said yourmarket share was, was around 286 million units and that would have representedon your numbers, I think about a 9% growth in the market this quarter. Greg, Ijust want to see if that's right.
Greg Brown
Yes, our team estimate is about285 million units, so close enough.
Ehud Gelblum - JP Morgan
Okay. And you expect that to go into double digits in the fourthquarter. I am expecting that to be not slower than previous seasonality. I amguessing, you expect it to be inline with what previous seasonality in thefourth quarter was?
Greg Brown
The only thing in Q4, that we areseeing really is double-digit industry growth and leave it at that.
Ehud Gelblum - JP Morgan
Okay, great. So, let me ask you aquestion about platforming. Ed, you said you're still on four platforms rightnow, where do you expect that to go? Is the idea that you are going to bringthe platforms down to maybe one or two from that four, and what the timeframeon that is? And if you can elaborate, when you define platform, I think for thelast couple of years, the definition of platform sort of has changed fromsilicon platforming to some level of software to some level of hard case. Andin line with that, if you can get in, what happened to the Scalpel platformthat we were looking forward to a couple years ago. Is that still around or isthat now off?
Ed Zander
Maybe I missed, not misspoke. Butwhen I say four platforms, that's actually four market segments. We've alreadyentered in the -- we architected the actual go-to-market. So, if you go intojust in Europe for example, you'll see the everydaycommunications, which is the low end of feature phones. And then you see themultimedia and then you see the productivity space. So, there's four differentproduct segments. We try to do as much commonality and platforming across thosefour segments.
So, we are attacking the softwarestrategy and focusing around less in terms of software platforms. We have someways to go there. Same thing with the chip architectures, alternate sourcesaround our chips at different price points and simplifying the chip strategyand then designing the architecture, which by the way, the Scalpel platform isthe RAZR2. I mean, that is the architecture, and some of the derivativeproducts off of Scalpel 2, some of the other names that we've been introducingare Scalpel derivatives, and that is the architecture. So, there isarchitecture for a broad level of our products. It doesn't necessarily one sizefits all.
So, one of the things we're doingis commonality and platforming on silicon software and architecture and gettingdown to as few as possible and then taking those platforms and driving the fourdifferent market segments and go to market around our products. We got awayfrom that a little bit in 2006, which you know caused some of the complexityand what we are driving right now, and Stu's operation is to get back moreplatforming and software in silicon.
Ehud Gelblum - JP Morgan
Okay, great, thanks.
Dean Lindroth
We'll take our last questionOperator.
Operator
Your last question is from DavidWong with Wachovia.
David Wong - Wachovia
Thank you very much. Can you giveus some feel for the relationship between your handset shipments and channelinventory? Do the September numbers include some amount of rebound from thesuppressed shipments into the channel from previous quarters or might thatrebound come in a later quarter?
Ed Zander
I'm not quite sure I understandthe question. But I can say that the channel inventory or stock in channel wasdown quarter-over-quarter sequentially and if you went back to March, I'd saydown substantially both in weeks and absolute number of units, which would meanthat our sell-through picked up.
David Wong - Wachovia
And would you expect it to comedown further in weeks going forward or are you at the right levels for theDecember quarter?
Ed Zander
Well, given my earlier commentabout our financial analysts meeting, you must assume that in an ideal world,we're going to drive that as well as we can, because it's an opportunity costthat's significant in size.
David Wong - Wachovia
Great. Thanks very much.
Dean Lindroth
Thank you. During this call, wehave made a number of forward-looking statements. Forward-looking statementsare any statements that are not historical facts. These forward-lookingstatements are based on the current expectations of Motorola and there can beno assurance that such expectations will prove to be correct. Suchforward-looking statements include, but are not limited to, our comments andanswers relating to the following topics, guidance from Motorola's earnings pershare in the fourth quarter of 2007, guidance for future sales, operatingmargins, profitability, operating earnings, ASP, and market share for each ofMotorola's segments, benefits to be realized from improvements in our cashconversion cycle, the impact on Motorola's performance of financial resultsfrom strategic acquisitions and divestitures, including those are recently completed,and those that are pending, and those that may occur in the future,expectations for expenses, workforce reductions, and cost savings related tothe company's ongoing reorganization activities, expected timing for theannouncement, launch and shipment of new products, the sales impact and pricingof new products, the tax rate in 2007, comments regarding future productcomponent supply.
Because forward-lookingstatements involve risks and uncertainties, Motorola's actual results couldmaterially differ from those stated in the forward-looking statements.Information about factors that could cause such differences can be found inthis morning's press release on pages 16 through 24 in item 1A of Motorola's2006 annual report on Form 10-K and Motorola's other SEC filings.
Thank you and this now concludesour call.
Operator
Thank you. Ladies and gentlemen,this does conclude today's teleconference. The presentation material andadditional financial tables will soon be posted on Motorola's Investor Relationswebsite. In addition, a replay of this conference will be available over theInternet in approximately three hours. The website address iswww.motorola.com/investor.
We thank you for yourparticipation and ask that you please disconnect your lines at this time andhave a wonderful day.
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