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Executives

Dean Lindroth - Corporate VP of IR

Ed Zander - Chairman and CEO

Tom Meredith - CFO

Greg Brown - President and COO

Analysts

Jim Suva - Citigroup

Phil Cusick - Bear Stearns

Edward Snyder - Charter Equity Research

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 America Securities

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 for holding. Welcome to Motorola's Third Quarter 2007 earnings conference call. Today's call is being recorded. If you have any objections, please disconnect at this time. After this teleconference, the presentation material and additional financial tables will be posted on Motorola's Investor Relations website. In addition, a replay of this conference call will be available approximately three hours after the conclusion of this call over the Internet through Motorola's investor relations website. The website address is www.motorola.com/investor.

At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation.

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

Dean Lindroth

Thank you, and good morning. Welcome to Motorola's third quarter results conference call. A number of forward-looking statements will be made during this presentation. Forward-looking statements are any statements that are not historical facts. These forward-looking statements are based on the current expectations of Motorola and there can be no assurance that such expectations will prove to be correct. Because forward-looking statements involve 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, such differences can be found in this morning's earnings release on pages 16 through 24 in Item 1A of Motorola's 2006 annual report on Form 10-K and in other SEC filings.

This presentation is being made on the 25th of October 2007. The content of this presentation contains time sensitive information that is accurate only as of the time thereof. If any portion of this presentation is rebroadcast, retransmitted or redistributed at a later date, Motorola will not be reviewing or updating the material that is contained herein.

With that, I would like to turn the call to Ed Zander, Chairman and CEO.

Ed Zander

Thanks, Dean, and good morning everyone. Thanks to all of you for getting up a little earlier for our call today. With me today are Greg Brown, President and Chief Operating Officer, and Tom Meredith, Chief Financial Officer. We are here to review our third quarter results and provide perspectives on the fourth quarter.

Our third quarter can be characterized by one word, progress. We improved our earnings and cash flow significantly compared to the second quarter and made substantial improvements in all key metrics in mobile devices.

We also further strengthened our category leadership in key emerging technologies and markets, such as broadband video, WiMAX end-to-end architecture, and Government & Public Safety and Enterprise Mobility segments.

Q3 was about execution, doing what we said we were going to do. And we also recognized there is a lot more work to do. Our management team is committed to returning the company to our financial targets, as outlined during the September Analysts' Meeting.

Some of the quarter specifics include, and Tom and Greg will give further color in just a few minutes, sales of $8.8 billion. On a GAAP basis, we were profitable, at $0.02 per share, from continuing operations. Earnings per share excluding highlighted items was $0.06 per share, up from $0.02 per share last quarter, and operating cash flow improved significantly to over $340 million.

Also, excluding highlighted items, gross margin percentage for the company improved sequentially and operating cost declined sequentially.

In Mobile Devices, we began to move in the right direction. We increased units, sales, and gross margin percentage while lowering operating expenses. These improvements resulted in significantly lower operating loss.

Home and Networks Mobility and Enterprise Mobility Solutions continue to see strong underlying demand for their products and technologies.

Finally, we announced the sale of our embedded communications computing business to Emerson for $350 million in cash.

Overall, we are optimistic about the future of our business. Seamless mobility and the mobile and fixed broadband Internet vision, we have articulated over the past few years are beginning to take hold in markets around the world.

Furthermore, our key R&D investments, in broadband video distribution, IP and IPTV, mobile products and solutions for the emerging enterprise space, advanced technologies such as video and IP networks for public safety applications worldwide, and next generation mobile devices with application services-enriched experiences, together with the many acquisitions over the past few years, will allow us to compete aggressively in the marketplace in years ahead.

In the near-term though, our priorities remain the same, continue to innovate, maintain operational discipline, and execute quarter-after-quarter.

Before we move on to discuss the detailed financials, I want to thank our employees around the world for all their hard work and dedication. Together we are making progress, but it's just a start.

Now, I'll turn the call over to Tom to cover the financial results.

Tom Meredith

Thanks, Ed. In the quarter, sales were $8.8 billion, down 17% versus last year and up 1% as compared to the second quarter. The year-on-year sales decline is all attributable to the Mobile Devices business segment.

On a GAAP basis, the company had earnings from continuing operations of $0.02 per share compared to earnings from continuing operations of $0.29 per share last year.

The third quarter GAAP results include highlighted items of $0.04 per share for charges associated with our announced workforce reductions and a writedown of intangible assets. Earnings per share excluding highlighted items was $0.06 per share.

My next several comments will also exclude highlighted items.

Gross margin percentage for the company increased sequentially by 80 basis points. This increase is primarily a result of the sequential gross margin improvement in Mobile Devices.

Operating expenses for the company declined by approximately $100 million compared to the second quarter, as a result of progress on our restructuring efforts. Looking by business, OpEx came down sequentially in all segments. The increase in gross margin percentage and improvement in operating expenses, resulted in an operating profit of $169 million up from the $32 million operating loss reported last quarter.

Below the line, total other income was $18 million compared to $54 million last quarter. We now expect an annual effective tax rate of 26% due to certain tax credits and the current forecasted mix of profits and losses in our various geographies. This resulted in a tax rate of 21.4% in the quarter. We expect next year to return to a more pivotal effective tax rate of 35% to 36%.

Operating cash flow was approximately $342 million in the quarter and positive in all three business segments. This reflects improving operating results in Mobile Devices and a seven day improvement in our overall cash conversion cycle. We ended the quarter with net cash of $4.2 billion, down slightly compared to last quarter due largely to acquisitions, share repurchases, payment of dividends and capital expenditures.

In the quarter, we used $115 million 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 billion share repurchase program has been completed. We've now repurchased approximately 351 million shares which represents approximately 14% of the outstanding shares in May 2005 when we initiated our first share repurchase program.

Our cash conversion cycle at quarter end was 43 days, compared to 50 days in the second quarter. We are in fact making progress. The seven day reduction was led by improvement in Mobile Devices which ended the third quarter at 37 days, 12 days better than last quarter.

Enterprise Mobility Solutions was 47 days, a six day improvement. So, without any huge structural changes, with a better focus, better alignment of our objectives and priorities, growing momentum 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 the second quarter and days inventory on hand or DIOs remained essentially unchanged at 43 days, while on accounts payable, BPOs showed a slight improvement. We can and will do better. We currently have a small team of hand picked leaders driving our ongoing efforts to improve the cash conversion cycle across all three business segments. I'm personally very encouraged, as are Ed and Greg, by the progress, we've made thus far particularly in Mobile Devices.

And we will get help from all corners of our company. I was traveling in Asia and Latin America during the last few months, visiting factories and customers, and talking about the cash conversion cycle. I'm more convinced now than ever the opportunities are there for the taking. We do see a clear path to reaching a cash conversion cycle of 20 to 30 days by the end of next year. This will be predicated on better receivable management and process, progress on inventory and value chain initiatives, and better terms from our supply base.

I'll turn now to our annualized return on invested capital, which we talked about last quarter. I've been talking about this metric and its importance, as I have been meeting with employees the past several months. More people are getting message everyday. As you know, this is a 12-month rolling average calculation. So, despite sequential improvement in operating results, the metric as of the end of the quarter is down and will do so until we begin to show improving year-on-year results.

We are taking number of actions which will enable ROIC improvement, one of which is our cost reduction programs. With respect to our workforce actions, I will share with you after the acquisition of Symbol and Good in January. We had approximately 72,000 employees. At the end of September, we had approximately 67,000 employees. The reduction reflects our workforce actions which are substantially complete and natural attrition another organization will continue. Operating expenses are, as mentioned earlier, coming down. So, we are clearly moving in the right direction. And as we said at our analysts' meeting, we expect total operating expense to decline approximately $500 million from 2007 to 2008.

Moving onto our outlook for the fourth quarter, we are encouraged by progress in Mobile Devices as compared to prior quarters. We expect continued improvement in the fourth quarter. So, while Stu and his team are focused on improving the portfolio, lowering the breakeven and making our cost structure more variable, these improvements do not come overnight or easily. Much remains to be done.

We expect fourth quarter earnings per share from continuing operations to be in the range of $0.12 to $0.14. Our focus continues to be on the quality of our earnings across all of our business units, including tight controls over operating expenses.

Now, I'll pass the call over to Greg who will review business operations in more detail and provide additional color 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 a slight sequential increase in ASPs. Our estimated market share in the quarter was about 13%. Excluding highlighted items, the operating loss in the quarter was $138 million, a significant improvement over both Q1 and Q2 results.

North America and Latin America continue to be our largest regions, accounting for 49% and 22% of sales respectively. We are the market leader in both of these regions. EMEA and Asia-Pac, both of which remain challenging, represent 14% and 15% of sales respectively.

Channel inventory levels continued to improve and have essentially returned in aggregate to levels that we would consider normal. Compared to last quarter, gross margin percentage improved, again, as a result of our new product offerings, which are collectively running at higher margins than the mature products in the portfolio. Operating expenses were lower due to progress in our restructuring program maintaining tight control over expenses and prioritizing investments.

With respect to our portfolio enhancement efforts, we continue to make further progress on our software and silicon initiatives. Earlier this month, we announced the purchase of a 50% stake in UIQ Technologies from Sony Ericsson. This will strengthen UIQ as an open application delivery platform for smartphones, and enable us to expand the Mobile Devices portfolio in the multimedia segment and regain traction in Europe in particular. This is part of our strategy to build an open software development environment and ecosystem for mobile devices.

Another important part of our software initiative relates to our ongoing Linux/Java efforts. In the quarter, we launched the Moto Magix, our Linux mobile platform, as well as MotoDevSuite Studio, which includes multiplatform tools aimed at developers.

In WiMAX, we're building on our leadership position. With the introduction of our chipset modem solution, this ultra high speed chip is optimized for both flip size and low power consumption, and will enable compelling WiMAX mobile devices next year.

Moving onto the products in the feature phone segment, RAZR and KRZR continued to be top sellers globally. We sold over 8 million RAZRs, bringing us to a total of now over 110 million RAZRs, and in the quarter nearly 3 million KRZRs. RAZR-2 has begun shipping to all regions and technologies. It's off to a great start meeting the needs of the demanding feature phones users and accounted for over 900,000 units in the quarter. 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 holiday selling season.

In the multimedia category, a priority category going forward, we expanded the ROKRZ6 music phone franchise and started shipping the CDMA Z6M in Latin America and North America, and in the US the Z6TV our first media flow device. The Z8 utilizing the UIQ interface is now also 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, the CDMA Q9M product is doing well with Verizon North America. The HSDPA Q9H is available throughout Europe, and is also available in Africa and Australia, and will begin shipping in North America in the fourth quarter.

In mass market, the W375 and W220 devices are among our top sellers. And we just announced seven additional W series products that encompass everyday communications needs with SMS, Bluetooth, FM Radio, cameras, games and other features at affordable price points.

So to recap, the operational changes we've made in Mobile Devices are beginning to yield results and we're making progress. We improved gross margin percentage, further improved stock in channel inventory, enhanced our product portfolio, and made progress on the software silicon front. Stu and his team are actively working to address the top priorities at hand and we expect to see more progress going forward.

Looking ahead, the market remains strong. Our top priority in the near term remains the same, enhancing our product portfolio and improving profitability. You've seen several enhancements already, RAZR2s, ROKRs, Qs, the additions to the W series lineup plus a few others as we head into the fourth quarter. Our brand remains strong, and our customers want us to be successful.

But keep in mind, we're not where we need to be in all product segments in the overall market. In the emerging markets, we will continue to compete with our current products and get more aggressive when we have low-cost solutions that will result in profitable growth moving forward.

In application services, we will continue to actively work with third-party developers and content providers including Yahoo, Microsoft, Google and others to develop an ecosystem and service delivery platform that will deliver rich experiences to consumers.

For the fourth quarter, we expect to see sequential improvements in both the top and bottom line for Mobile Devices.

Looking at Home and Networks Mobility, sales for the segments were $2.4 billion up approximately 6% versus last year and down approximately 7% versus the second quarter. Excluding highlighted items, operating margin decline to 6.9% versus 10.2% last year and 8.1% in the second quarter.

As we anticipated third quarter sales in the home business declined sequentially to $950 million and operating margins were under some near-term pressure due to the acceleration of purchases in Q1 and Q2 related to the US FCC mandate on separable security. It's important to note, however, that the underlying demand remain strong and sales increased 18% year-over-year reflecting growing demand for high-definition and video-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 up 27%.

In digital entertainment, we maintained our market leadership position with unit volume in the quarter of 2.7 million devices of which HD DDR was approximately 40% and IP was 25%. As compared to year ago, unit growth is up 11%, driven by high-end devices in IP set-tops. IP continues to gain momentum as demonstrated by the shipment of our 2 million IP set top box device coming just five months after reaching the 1 million mark. This was led not only by US operators but also strength we're seeing in Europe.

Modem shipments were 2.5 million units, up 6% from last year, all driven by products from our Netopia acquisition.

On the product front, we introduced the DSR 6000 series receivers/transcoders enabling programmers to distribute content in MPEG4 HD format while enabling service providers to deliver either MPEG4 or MPEG2 in either standard definition or hi-def formats.

And, finally, we strengthened our video core portfolio by closing two acquisitions, Modulus Video and Terian Communications. We also closed on Leapstone Systems, our leading communications software developer. Key video solution wins in the quarter included HBO, Starz Entertainment, and BT. In addition, Comcast recently selected us for the rollout of their switched digital video solution.

Turning to cellular networks, the industry is highly competitive and continues to be challenging. We do not expect this environment to change anytime soon. Our overall network sales were flat, sequentially, with product mix essentially unchanged. As we've talked about before, pricing and margin pressures in GSM and the declining level of iDEN infrastructure sales in the US continue to put pressure on operating margin.

In mobile broadband, we conducted the world's first WiMAX 802.16e mobile handoff during the WiMAX World Conference in Chicago just a few weeks ago. This successful demonstration proved to customers, media and analysts that this technology works and it will provide a truly unique experience to consumers around the world, including web browsing, voice over IP, and video streaming. We were also awarded WiMAX contracts to deploy our solution at Bahrain and Uganda, and just weeks ago, when the largest WiMAX network deployment in Taiwan.

Looking at the fourth quarter for the home and network mobility segment, we expect sequentially higher sales with slight improvements in operating margin. This reflects continued strong year-over-year demand for home and flat to slightly lower network sales.

Now, let's take a look at Enterprise Mobility Solutions. Sales for Enterprise Mobility Solutions were nearly 2 billion, flat sequentially and up as compared to last year largely due to the Symbol acquisition. Sales from Symbol grew again in the double digit range year-over-year. Excluding highlighted items, operating margin for this segment was 17.2%, as compared to 15.7% in the second quarter.

Government and Public Safety had another solid quarter with sales up approximately 8% year-over-year and continued strong operating margin levels. North America accounted for 62% of sales, with continued strong demand for our digital systems solutions. In EMEA which represented 24% of sales, momentum in TETRA continued with additional nationwide rewards.

In Asia-Pac and Latin America, 8%, and 6% respectively, we launched the Moto Turbo product, our dual-mode digital 2-way communications platform which integrates voice and data. We've also realized benefits from the 800 MHz rebanding, with solid year-on-year growth in both services and equipment, and are encouraged by the growing interest in next generation public safety systems here in the US.

In Enterprise Mobility, sales increased slightly compared to the second quarter to over 570 million which is typically a seasonally weaker quarter. Operating margin declined sequentially, largely due to costs associated with the ongoing integration efforts. The Americas accounted for 65% of sales in the quarter, while EMEA and Asia-Pac represented 28% and 7% respectively. We'd solid sales results in North America due to opportunities in retail, transportation and logistics and field mobility. Europe and Asia-Pac had strong year over year performance also driven by retail and field mobility, in addition to healthcare.

The overall integration continues to go well, and Motorola's brand recognition is beginning to broaden opportunities for Symbol's Enterprise product offerings. On the product side, we shipped our one million MC9000, the industry's best-selling rugged mobile computer. We also began shipping the MC17, a new handheld device aimed at retail in-store applications for enhanced personal shopping experience.

With respect to Good Technologies, we recently announced the availability of the Good mobile messaging 5.0 release which makes mobile e-mail more personalized and productive while enhancing IP controls. Our roadmap integration and planning continues. We currently expect that the Good software will be integrated into many of our rugged mobile computing products, including the MC35 and MC70 by the end of year. This will enhance the customer experience, and user capabilities, by providing push email and other enterprise grade services. Looking ahead to the fourth quarter, we expect Enterprise Mobility Solutions segment to deliver sequentially higher sales and continued double digit operating margin.

In closing, as we look overall, third quarter operating performance, we're seeing results from the changes we've implemented. We'll continue the momentum and drive further improvements in the coming quarter. With continued execution, our global brand and healthy market trends across key businesses, we're well positioned for the long-term.

And with that I'll turn it back over to Dean.

Dean Lindroth

Thanks, Greg. Before we begin taking questions, I'd like to remind callers to limit themselves to one question 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 big congratulations to you all. I'm very impressed, especially with the more disciplined nature of the cost controls and as we look forward into say Q4, I guess my question is like on the SG&A line, and with those cost controls and more disciplined nature, are we expecting continuing decrease in SG&A or we are at kind of a level now of a lot of those initiatives kicking in and you need to have SG&A to support your higher growth? How should we think about that disciplined nature?

Tom Meredith

This is Tom, we're going to continue to have very tight control on operating expense as I mentioned during the call, and we're really not going to provide additional guidance on gross margins or OpEx at this point. And much like I said on the call last quarter, I know many of you are just dying for us to give you sort of the ASP guidance, unit guidance, and gross margin guidance, but we're just not going to be in the position on this call or any time off this call in the near term to give that kind of detailed guidance right now.

I think Greg provided a lot of color, as did Ed, on the kinds of decisions we're taking in our focal points and I trust that we'll be continuing to, as we get further out in time on the Q4 call and in the Q1 call, we'll be giving more clarity around our going forward guidance.

Jim Suva - Citigroup

Okay, then maybe just a quick clarification, on the actual Q3, results then, for some of these initiatives and disciplines, I would imagine that they were definitely not involved for the entire 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 more guidance on OpEx, than I'm prepared to go into right now.

Jim Suva - Citigroup

Okay, great, thank you. And again, congratulations.

Dean Lindroth

Thanks, next question please?

Operator

Thank you. Your next question is from Phil Cusick with Bear Stearns.

Phil Cusick - Bear Stearns

Hey, guys. I'm going to ask something similar, but you've been losing share in a bunch of regions around the world. And I wondered if you expect to gain a little bit of share back in the fourth quarter or whether that little bit of drop is going to continue for a while?

Ed Zander

This is Ed. First of all, I think you're referring to Mobile Devices. We actually think we gained share and again, I think the revenue of the other businesses are certainly significant now, so I think Government and Public Safety, when we look to those numbers and in the connected home business and some of our WiMAX stuff we're doing, and in the Enterprise Mobility are all share gains. The mobile device situation is very simple, I think at the beginning of the year, we said the first thing we need to do is to get profitability and I think profitability eventually drives market share. So, we're focused on profitability, and quality of earnings, lowering our cost structure, getting new products out and we'll continue to do that.

In some areas of the world, like North America, Latin America, we still maintain our number one position. As Greg said, we're challenged in some of these other geographies. But we're trying to dial this in and start to get Stu and his team to think about top line and market share, but first we really need to baseline the profitability.

Greg you want to--?

Greg Brown

Yeah, clearly we're focused on improving profitability and improving the product portfolio. In parallel, when we do that, market share follows, we're obviously not giving any forecasted guidance 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 market share. That was the goal in 2004 and it's the goal today. We have to work on that first word first. And that is Profitable. And we get that; as we saw back in 2004, the market share comes. We can invest and do the kinds of things we wanted to do. So, it's profitable market share. Greg and Stu were driving the profit side along with Tom.

Phil Cusick - Bear Stearns

If I can follow-up, the inventory being back to normal it is just great after a pretty tough time, but is that back to normal across the board or is there still some pockets of issues?

Greg Brown

Yeah. I think in aggregate it has returned to what we'd characterize as normal. There are certain areas that can improve, we always think we can improve on stock and channel inventory, that's the mentality we have going forward.

Phil Cusick - Bear Stearns

Thanks, guys.

Dean Lindroth

Thanks, next question, please?

Operator

Thank you. Your next question is from Edward Snyder with Charter Equity Research.

Edward Snyder - Charter Equity Research

Thanks a lot. And nice improvement in most of your metrics. Regarding Mobile Devices, you've got several models out that are selling particularly well in the RAZR platform, but when 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 lot of your product on the RAZR platform. And it would seem that real market share gains and further enhancement of profitability for your phones isn't going to come until we see something completely new. Any idea? Can we look forward to this in sometime in 2008 or do you think it will take longer than that?

Greg Brown

Actually as we mentioned, we're pleased with RAZR2 sales out of the gate with 900,000 units in the quarter and now being made available in all technologies and geographies. The W series has been refreshed as well. We like that. It'll address more of the mass market opportunities 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. So it's solid.

Stu did reference at the financial analysts meeting, a richer experience multimedia phone. I would simply say, stay tuned it's a very important category for us. It's right for opportunity, particularly in Europe and it's an addressable market historically that we haven't played in. So, you'll see things 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 not looking to move particularly quickly away from this platform in the next--?

Ed Zander

The RAZR2 is, it's based on a certain architecture platform that gives derivative products. The W is an independent low end platform that is not RAZR2 base and here is Q of course and neither is the Z series, which I think Greg was talking about, and that is the multimedia platform based on UIQ.

There's four platforms in the company right now, and there's derivatives based off that. I think you'll see a number 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 to expand dramatically in the 3G space, when we talked about that at the analyst meeting. And with the addition of UIQ and some of the work we're doing on Linux/Java to bring in the rich multimedia application services type products that we need at the high end.

So, what was going on, is the low end with W we're doing cost controls and supply chain and ability to compete in these emerging markets in 2008, with a better cost structure, and at the high end with UIQ and Z series to compete in the multimedia segment. So, I think you'll see that unveil in the four buckets we talked about.

We are pleased with RAZR2s. I think we did almost 1 million units. I would say that was done in 80 days. I must say that the popular product everybody talks about today, also did about 1 million units in 90 days. So, we're pretty excited about additional acceptance with the RAZR2 product.

Edward Snyder - Charter Equity Research

Thank you.

Dean Lindroth

Thanks, next question, please

Operator

Thank you. Your next question is Mr. Mark Sue with RBC Capital Markets.

Mark Sue - RBC Capital Markets

Ed, it's encouraging, but your plans of V-shaped recovery in Mobile Devices is looking more like a U, which has significant implications, some of which are forward moving competitive targets and loosening carrier relationships. Any thoughts of accelerating the process at Motorola as it relates to product development so that it becomes more of a collaborative effort between you and the carriers?

Ed Zander

I think you have a good point. I do believe that the recovery in this business, in my four years, you are watching what happened back in 2004 can be quick with good product execution. And the hard thing is to pick the inflection point. I think what we needed to do in the last six months is to put the operational discipline and execution back into Mobile Devices, so it's not dependent on a one-hit wonder such as RAZR, even though everybody would like to have that. I think we're doing that. I think we have got now the kind of discipline you see in the results, improvements in the results.

We work with Verizon, for example, on the Q9 music device. We are working with a number of our carriers on specific products. Greg and I spent last week in Europe and it was refreshing talking to all of the major big carriers there. I think we were absent at the first part of 2007 and we had a great number of engagements with 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 the recovery, 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 question please?

Operator

Thank you, your next question is from Brant Thompson with Goldman Sachs.

Brant Thompson - Goldman Sachs

Hi. Just two quick things. I was wondering if there was any incremental color on the other line and in terms of what's composed in that other line. This represents a significant loss. It's obviously changed a lot over the last couple years. And then secondly, on the gross margin improvement on the handset, obviously, you have a lot of new products that are coming into the mix that are helping that -- but could you give us any color as to where we are with regard to the mix of the older products and versus some of the newer and whether or not the gross margin improvement is being seen because you've taken and really improved gross margins in your lower end phones versus higher end phones. Any other color you could offer on the dynamic of that improvement would be great. Thank you.

Tom Meredith

Brant, this is Tom. In the context of the other line, what you have to understand is, and we recognize that this line obviously makes modelling our company somewhat difficult because it does move around a lot. But included in that line is stock compensation and intangible amortization, and periodically you have some other items that hit it. 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 you would expect. They come with commensurate higher gross margins. That's part of the story. We also improved gross margins on some of the other piece as of the portfolio due to supply chain efficiencies and material cost take down and lastly the element is pricing where we've been more disciplined in pricing and channel rationalization globally. So, it's gross margin improvement in some of the 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 is from Tal Liani with Merrill Lynch.

Stan Kovler - Merrill Lynch

It's actually Stan Kovler calling in for Tal.

I just have a question on the outlook in general. Wanted to understand if, just in general terms, I understand you're not giving guidance per line item, if you would characterize the drivers for the sequential EPS improvement more top-line driven or operating driven?

Tom Meredith

This is Tom, let me do it by segment. In terms of Mobile Devices, we do see, sequentially seeing our top-line go up, revenue units up and improvement in our bottom line and home and networks, it'll also be sequentially up. And that's largely going to be driven by a rebound in home and networks will be flat to slightly down.

We do anticipate slight improvement in the bottom line in Home and Networks also driven largely by home. And in our Enterprise Mobility group, I'd say up sequentially on the top-line in 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 in the Government and Public Safety business because of USPS. And we do expect double digit OE in E&S. So, that's sort of the some of the various segment guidance.

Stan Kovler - Merrill Lynch

Thanks. If I just follow-up question on the enterprise and mobility business. Federal government was not really mentioned as far as the US as driving the strength, and your comments signal some caution there. Should we think about the business there being driven more by Symbol and by the sales of the new terminal products you have?

Greg Brown

Yeah, actually the overall demand trends in both traditional public safety and Symbol are very strong. As Tom just referenced, I think some of the year-over-year comps, as it relates to public safety specifically a little bit more difficult because of the US Postal Service contract embedded in the comparative base year of last year. But I would actually say both businesses are going strong; as we mentioned Symbol has exceeded our expectations from an integration standpoint, a product development standpoint and a financial standpoint. But both businesses are doing very well.

Dean Lindroth

Thank you, next question please.

Operator

Thank you. Your next question is from with Ittai Kidron with CIBC World Markets.

Ittai Kidron - CIBC World Markets

Thank you very much. I have to say, looking at the numbers, I am actually somewhat disappointed. It looks like a lot of the upside in the fourth quarter is really just tax-driven Tom, can you comment on the progress of turning around the Mobile Devices unit from an operating margin standpoint? It looks like you made progress, but still far from reaching breakeven with ASPs flat quarter-over-quarter. When will we see ASPs move up by dollars and not cents? And what is the level of volume or ASP that you see as required in order to breakeven in that business?

Greg Brown

Yeah, this is Greg. Just from a Mobile Devices standpoint, ASP has increased a little bit to $121 for Q3. I think, I would just reorient and tell you that we are very, very focused on profitability and margin. ASPs move at any point in time and are a reflection of the aggregate portfolio, but we're driving to clearly improve profitability and product refresh. While we did lose money, we cut the operating loss in half and we are absolutely with urgency and intensity focused on improving profitability 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 break down.

Just on gross margin percentage, we have sequentially improved it, for I think three quarters in a row and also for three quarters in a row in Mobile Devices. So, it's a very regimented disciplined stair step. And we're working hard on all levers, pricing, new product efficiencies, new product, higher gross margin, richer experiences and that's the cadence of what we're going to continue to drive from an overall portfolio standpoint over time.

Ittai Kidron - CIBC World Markets

Yet a follow-up on that. It seems like the pace of improvement of your gross margin is growing significantly.

And can you comment in your handset portfolio, if you take the volume that you shipped this quarter, what was the percentage of handsets, that in your opinion are within the standards you want your handset business to be from a margin standpoint? What is the number of handsets that are below par right now?

Tom Meredith

Actually we're not going to get into that level of detail on the call and I have to go back to your opening comment about the progress that we are projecting in the current quarter, Q4 being largely driven by tax. I guess I'd like to invite you to take that offline with the IR community. Because for example, in the third quarter, just to be very clear, we had an obviously favorable tax rate largely driven by the vagaries of how you calculate effective tax rates, but that was offset by essentially the delta in interest income in sequential terms which was down significantly quarter-over-quarter. So, there was a penny offset and penny upside, and that's just the way it is. I'm perplexed by your question, and I would invite you to take that offline.

Ed Zander

When you go offline, I'd also like to pick up the gross margin. Because actually Q3 was actually a very good improvement 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 least talk to you. Thanks, Next question.

Dean Lindroth

Next question.

Operator

Thank you. Your next question is from 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 coming there? Obviously it's very important to regaining share, particularly in Europe when you talk about some of the new phones you have coming in that area. And then give us a view of what you see the overall industry looking like going into Q4. What do you see inventory levels looking like across the regions? How do you see demand shaping up in Q4, overall? Thanks.

Greg Brown

So, from a demand perspective in Q4, obviously we see the industry growing, generally double digit plus. We are introducing more 3G products. Particularly RAZR2s both on EBDO in the CDMA community as well as on the HSDPA side. Obviously it's important in an area and a product portfolio; we'll continue to focus on and stock and channel inventory, in aggregate, as we mentioned continues to improve very nicely and we'll attack all regions as aggressively as we can, for alignment with customers as well as the cash conversion cycle benefits associated with that.

Ed Zander

Two other things on 3G also the Q9, HSDPA are all 3G products that are now shipping in Europe and will be here shipping in United States very shortly. And the other thing is, it is a priority obviously, 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 all 3G-based, too. And then, finally, of course one of the biggest priorities in those two shop is a lower-cost 3G product and I think we talked about what we're doing in that space at the analyst meeting, and stay tuned for that in 2008.

Dean Lindroth

Thank you, next question please?

Operator

Thank you your next question is from Matthew Hoffman with Cowen.

Mathew Hoffman - Cowen

Yeah, thanks. Two of Motorola's competitors have commented on production capacity issues and component shortages that affected their results somewhat in 3Q. Is Motorola running into any of the same shortages right now? Is there anything out there that might prevent the company from actually meeting demand in 4Q?

Second, housekeeper for Tom, I was hoping you could allocate the $0.04 of charges by line on the income statement, help us with the pro forma reconciliation? Thanks.

Greg Brown

Yeah, on the first point, we do not see supply issues affecting us in Q4 at this point.

Tom Meredith

And actually, the breakout on the highlighted items is on our website. If you just double-click on that flash on the 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 is from Jeff Kvaal with Lehman Brothers.

Jeff Kvaal - Lehman Brothers

Thanks very much, team. Tom, I was wondering if you wouldn't mind enlightening us little bit about your plans on the share repurchase program, things have slowed here a little bit, and there's some room to go? Thank you.

Tom Meredith

On share repurchases, as I had mentioned, 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 going to do that over time. I'm not really going to announce how aggressive we're going to be, but obviously as our cash flow situation improves, we obviously are 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 also long-term debt maturing and watch that space in coming weeks because we obviously are going to have to deal with that.

Dean Lindroth

Alright, thank you, next question please?

Operator

Thank you. Your next question is from Richard Windsor with Nomura.

Richard Windsor - Nomura

Hi, good afternoon, thanks. Just a quick one really, I wonder if you could talk about in Mobile Devices, what was the impact of any intellectual property royalties, both in terms of revenues and perhaps on profitability?

Tom Meredith

Actually, we're not going get into that level of detail. I will say one comment, on the year-over-year business 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 with Maynard Um with UBS.

Maynard Um - UBS

Hi. Thank you, clarification on the question if I could. On the clarification, was there any favorable currency impact to Mobile Devices in ASPs? And then the question -- on the changes at Sprint and the potential impact to WiMAX from a mobile device and network standpoint, does that push it out further beyond 2008? Thanks.

Tom Meredith

Obviously, as the dollar weakened, our revenues and therefore, to the extent we had net profit from any business segments, we were favorably affected by the currency. Beyond that, I guess I'd invite you to go offline and talk. It depends on the level of granularity and detail you want with our IR team. And what was the second part of the question?

Ed Zander

Yeah. In terms of Sprint, obviously, we don't see any point at this juncture with any strategic changes as a result of their WiMAX initiative. We're in close touch and aligned with Sprint's senior management and have reason to believe that Barry West's organization continues to move forward, given the 2.5 spectrum that they have and the strategic importance of WiMAX over time. So, we're still approaching this business as usual.

Maynard Um - UBS

Great. Thank you.

Operator

Thank you. Your next question is from Tavis McCourt from Morgan Keegan.

Tavis McCourt - Morgan Keegan

Hi, guys, thanks. It's Tavis. I had a question on the sequential revenue trend, geographically, in the mobile business. 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 are the three other regions, US, EMEA, and Asia?

Greg Brown

Yeah. Again, I don't think we comment on sequential revenue trends, but just to go back to my point on market share in North America, we remained number one. In Latin America to your point we gained share. EMEA was effectively flat and Asia-Pac specifically was down slightly and I would attribute that to India and some of the emerging markets and just a little bit to China.

Tavis McCourt - Morgan Keegan

And what is the timing expectation on being able to get more aggressive in the emerging markets with a lower cost platform?

Greg Brown

We're in the emerging markets today. And we have the feature phone product portfolio that's beginning to get traction 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, where the majority of the growth is. That said, we'll always evaluate opportunistically in the very lower tier and other areas, and we have a more competitive cost structures to compete in some segments of the markets where we're not competing today.

Ed Zander

I think the good news, and just little bit 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 good partners there. Given the right products, what we deliver, I think there's opportunity. It was pretty encouraging to see the kind of momentum that we have built-up over the past several years. So, we got to work on products, and W series is a good start. I think, Stu is working on some other products that give us the profitability. With the channels we have, the brand we have, I think we can regain some of that emerging market share with our retailers and distributors 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 Paul Sagawa with Bernstein.

Paul Sagawa - Bernstein

Hi, actually I have a question of -- you've had some remaining channel inventory clearance, activities in the quarter. Can you give a bit of a sense of what the costs of that have been? How much inventory did you, channel inventory did come down this quarter? So just sort of idea comparatively as look forward in a clear inventory, channel inventory at normal levels range, what kind of benefits you'll derive from that in your general --

Tom Meredith

Paul, this is Tom. At the financial analyst meeting you may recall that I posted a chart that talked about our value chain in Mobile Devices.

Paul Sagawa - Bernstein

Yes.

Tom Meredith

And from the time the very first component was bought from one of our suppliers through the time the product exited a channel or distributor operator was roughly 5.5 months, which we felt was entirely too long relative to what we believe our competition is posting in that same vein. And we talked about four to six operating margin points being available to us to shrink that. So, if that's the question, then I'd say I would stick with that number as a guidepost for what it cost us to have channel inventory.

Ed Zander

I think the second thing is, just more qualitative. I was in China last month, just working now with these distributors to sell our new products and to get them energized about taking some of the new things we've introduced and go to market with it. So, it's back to where we were a while ago in terms of 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 about the qualitative aspects of having the inventory addressed in the channels.

Dean Lindroth

Next question, please?

Operator

Your next question is from Tim Long with Banc of America.

Tim Long - Banc of America Securities

Thank you. If I could just get back to the handset side and pricing strategy. You did talk a little bit about a potential shift in strategy back towards market share gains when you get back to profitability. Could you just give us a little more color there? Does that mean as soon as the business turns profitable or when you get to a base level of profitability, say 5% or so? And at that point, how does the model start to look? Do we start to look at more unit growth being offset by back to the ASPs declining a few percent a quarter on a sequential basis? Just a little color on strategy and how you're looking at that. Thank you.

Greg Brown

Tim, we are not changing strategy. Our strategy is profitable growth and product portfolio enhancement in parallel. What we were saying was you have got to make money and our focus is on making money. And commensurately, as we do that and get the flow through and the operating leverage of the model as well as continue to expand the product portfolio into segments that we've been traditionally limited in playing, those two things in combination should allow us to grow share over time. That's what we're talking about.

Tim Long - Banc of America Securities

Okay, then maybe just clarify the comment I think that Ed made that soon you're going to get Stu to focus more on the market share gain, maybe just clarify what that meant exactly?

Ed Zander

Look, I think all of our businesses 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 devices that are growing. This management team is focused obviously on profitable market share. We want to be number one in every place we have with good profitability. I think the emerging markets were and still are an opportunity to grow market share and grow it profitability.

I think we got carried away a little bit at the end of last year. And I think we set back a program now to introduce products there with distribution channels that are going to be profitable. 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 is in marketplaces like Europe and the United States, we have rich experiences, focus on the right products with the right profitability, and in the emerging markets do the same. So, I didn't want to imply that we're going to change any strategy once the situation improves here. It's just the other way around. More disciplined about continuing with profitable market share is the way to look at our strategy.

Tim Long - Banc of America Securities

Okay. Thank you.

Dean Lindroth

Next question, please.

Operator

Your next question is from Ehud Gelblum 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 I could. It sounds like your estimate of the market, given where you said your market share was, was around 286 million units and that would have represented on your numbers, I think about a 9% growth in the market this quarter. Greg, I just want to see if that's right.

Greg Brown

Yes, our team estimate is about 285 million units, so close enough.

Ehud Gelblum - JP Morgan

Okay. And you expect that to go into double digits in the fourth quarter. I am expecting that to be not slower than previous seasonality. I am guessing, you expect it to be inline with what previous seasonality in the fourth quarter was?

Greg Brown

The only thing in Q4, that we are seeing really is double-digit industry growth and leave it at that.

Ehud Gelblum - JP Morgan

Okay, great. So, let me ask you a question about platforming. Ed, you said you're still on four platforms right now, where do you expect that to go? Is the idea that you are going to bring the platforms down to maybe one or two from that four, and what the timeframe on that is? And if you can elaborate, when you define platform, I think for the last couple of years, the definition of platform sort of has changed from silicon platforming to some level of software to some level of hard case. And in line with that, if you can get in, what happened to the Scalpel platform that we were looking forward to a couple years ago. Is that still around or is that now off?

Ed Zander

Maybe I missed, not misspoke. But when I say four platforms, that's actually four market segments. We've already entered in the -- we architected the actual go-to-market. So, if you go into just in Europe for example, you'll see the everyday communications, which is the low end of feature phones. And then you see the multimedia and then you see the productivity space. So, there's four different product segments. We try to do as much commonality and platforming across those four segments.

So, we are attacking the software strategy and focusing around less in terms of software platforms. We have some ways to go there. Same thing with the chip architectures, alternate sources around our chips at different price points and simplifying the chip strategy and then designing the architecture, which by the way, the Scalpel platform is the RAZR2. I mean, that is the architecture, and some of the derivative products off of Scalpel 2, some of the other names that we've been introducing are Scalpel derivatives, and that is the architecture. So, there is architecture for a broad level of our products. It doesn't necessarily one size fits all.

So, one of the things we're doing is commonality and platforming on silicon software and architecture and getting down to as few as possible and then taking those platforms and driving the four different market segments and go to market around our products. We got away from that a little bit in 2006, which you know caused some of the complexity and what we are driving right now, and Stu's operation is to get back more platforming and software in silicon.

Ehud Gelblum - JP Morgan

Okay, great, thanks.

Dean Lindroth

We'll take our last question Operator.

Operator

Your last question is from David Wong with Wachovia.

David Wong - Wachovia

Thank you very much. Can you give us some feel for the relationship between your handset shipments and channel inventory? Do the September numbers include some amount of rebound from the suppressed shipments into the channel from previous quarters or might that rebound come in a later quarter?

Ed Zander

I'm not quite sure I understand the question. But I can say that the channel inventory or stock in channel was down quarter-over-quarter sequentially and if you went back to March, I'd say down substantially both in weeks and absolute number of units, which would mean that our sell-through picked up.

David Wong - Wachovia

And would you expect it to come down further in weeks going forward or are you at the right levels for the December quarter?

Ed Zander

Well, given my earlier comment about 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 cost that's significant in size.

David Wong - Wachovia

Great. Thanks very much.

Dean Lindroth

Thank you. During this call, we have made a number of forward-looking statements. Forward-looking statements are any statements that are not historical facts. These forward-looking statements are based on the current expectations of Motorola and there can be no assurance that such expectations will prove to be correct. Such forward-looking statements include, but are not limited to, our comments and answers relating to the following topics, guidance from Motorola's earnings per share in the fourth quarter of 2007, guidance for future sales, operating margins, profitability, operating earnings, ASP, and market share for each of Motorola's segments, benefits to be realized from improvements in our cash conversion cycle, the impact on Motorola's performance of financial results from 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 to the company's ongoing reorganization activities, expected timing for the announcement, launch and shipment of new products, the sales impact and pricing of new products, the tax rate in 2007, comments regarding future product component supply.

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

Thank you and this now concludes our call.

Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference. The presentation material and additional financial tables will soon be posted on Motorola's Investor Relations website. In addition, a replay of this conference will be available over the Internet in approximately three hours. The website address is www.motorola.com/investor.

We thank you for your participation and ask that you please disconnect your lines at this time and have a wonderful day.

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