Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Dean Lindroth - Corporate VP of IR

Greg Brown - President and CEO

Paul Liska - EVP and CFO

Analysts

Maynard Um - UBS

Phil Cusick - Bear Stearns

Mark Sue - RBC

Brian Modoff - Deutsche Bank

Mike Walkley - Piper Jaffray

Ehud Gelblum - JPMorgan

Tim Long - Banc of America

Jeff Kvaal - Lehman Brothers

Ittai Kidron - Oppenheimer

Jim Suva - Citigroup

Richard Kramer - Arete

Scott Coleman - Morgan Stanley

David Wong - Wachovia

James Faucette - Pacific Crest

Mark McKechnie - AmTech

Tavis McCourt - Morgan Keegan

Bill Choi - Jeffries

Mathew Hoffman - Cowen

Samuel Wilson - JMP Securities

Motorola Inc. (MOT) Q1 2008 Earnings Call April 24, 2008 8:00 AM ET

Operator

Welcome to Motorola's first quarter 2008 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 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 today's call. With me this morning with me today are Greg Brown, President and Chief Executive Officer; and Paul Liska, Chief Financial Officer.

A number of forward-looking statements will be made during this presentation. Forward-looking statements are any statements that are not historical facts. These forward-looking statements are based on the current expectations of Motorola, and there can be no assurance that such expectations will prove to be correct. Because forward-looking statements involve risk and uncertainties, Motorola's actual results could differ materially from these statements. Information about factors that could caused, and in some cases have caused, such differences can be found in this morning's press release on pages 18 through 27 in Item 1A of Motorola's 2007 Annual Report on Form 10-K and in Motorola's other SEC filings.

This presentation is being made on the 24th of April, 2008. The content of this presentation contains time sensitive information that is accurate only as of the time hereof. If any portion of this presentation is rebroadcast, retransmitted or redistributed at a later date, Motorola will not be reviewing or updating the material that is contained herein.

Before we begin, I want to remind everyone that details outlining highlighted items, our GAAP to non-GAAP P&L reconciliations and other financial information can be found on our website, as well as today's slides and an audio replay.

I will now turn the call over to Greg.

Greg Brown

Thanks, Dean. Good morning and thank you joining us. I'll begin today with a few opening comments about the quarter after which Paul will take you through the consolidated financial results. I'll then come back to discuss the individual businesses and provide some perspective on the second quarter.

With respect to financials, we reported a first quarter GAAP loss of $0.09 per share on sales of approximately $7.4 billion. The loss excluding the highlighted items was $0.05 per share, and in line with the guidance we provided on our last earnings call.

During the quarter, we announced our decision to pursue the creation of two independent publicly traded companies, and we have a leadership team and functional workgroups addressing the requisite financial, tax, regulatory, legal planning and analysis. We've taken further steps toward improving and enhancing the mobile devices portfolio and reducing costs, and our Board reached a settlement that avoided a costly and distracting proxy contest, and just recently named Dave Dorman as our incoming Non-Executive Chairman.

Now I'll pass the call over to Paul to go through the financials.

Paul Liska

Thanks, Greg. In the quarter, sales were approximately $7.4 billion, down 21% compared to the first quarter of last year. The year-on-year sales decline is all attributable to lower sales in Mobile Devices.

On a GAAP basis, the company had a loss from continuing operations of $0.09 per share, which is flat with the first quarter of last year. The GAAP results include a net charge for highlighted items of $0.04 per share, primarily related to a charge associated with workforce reductions. More details on these items can be found on our website. My remaining comments will all exclude highlighted items.

The loss per share was $0.05, compared to a profit of $0.02 per share in the first quarter of last year. Gross margin percentage for the company was essentially flat from the fourth quarter, but up from the first quarter of last year, primarily a function of our overall sales mix.

As you know, we have discussed our cost reduction objectives on earnings calls both last year and this past January. Our actions were projected to result in a $1 billion in net cost reductions. Since we have substantially completed the planning in many of the associated actions, we want to level set everyone.

As compared to our 2007 results, we currently expect net reductions in 2008 of approximately $540 million in selling, general and administrative expense, and $240 million in research and development expense. We also anticipate a reduction of approximately $220 million to impact our cost of goods sold.

That said, there were will be puts and takes related to acquisitions and divestures, and the costs associated with the creation of two separate companies.

In the first quarter, we reduced operating expenses by $205 million compared to the first quarter of last year, and $138 million sequentially. The impact of lower sales in the quarter was partially offset by the reduction in operating expenses resulting in an operating loss in the quarter of $140 million compared to operating earnings of $11 million in the first quarter of last year.

Total other income and expense was a net expense of $16 million. This compares to net income of $52 million last quarter, which included a gain on the sale of Embedded Communications Computing and net income of $39 million in the first quarter of last quarter due to higher levels of interest income.

Our ongoing income tax rate is 34%. Operating cash flow was $343 million, primarily resulting from the settlement payment to Freescale for which we took a charge in the fourth quarter of 2007.

In the quarter, we repurchased 9 million shares of common stock at an aggregate cost of $138 million. To-date, $7.9 billion of our total $11.5 billion of the stock repurchase authorization have been completed.

The operating cash outflow along with share repurchases, debt retirements, acquisitions, dividends and capital expenditures resulted in a net cash balance of $3.5 billion as compared to $4.3 billion at the end of the fourth quarter.

Cash conversion cycle at quarter end was 46 days, 10 days lower compared to the first quarter of last year, but up 13 days sequentially. This sequential was mainly attributable to slightly higher inventory, higher receivable days due primarily to our mix of businesses and sales linearity, partially offset by approved accounts payable days. That said we expect sequential improvement in the second quarter.

Moving onto our outlook, for the second quarter we expect a loss from continuing operations of $0.02 to $0.04 per share excluding items of the variety highlighted in our quarterly earnings releases.

Now I will pass the call back to Greg, who will discuss the business operations in more detail.

Greg Brown

Thanks, Paul. In Mobile Devices, sales for the first quarter were $3.3 billion on volume of 27.4 million units. Our estimated market share was 9.5% due primarily to a decline in North America. As we previously discussed, we continue to be impacted by gaps in our product portfolio. North America was still our largest region, and accounted for 44% of total Mobile Devices sales, Latin America accounted for 25% of sales, while Asia-Pac and EMEA made up the remaining 17% and 14% respectively.

Our ASP was up slightly reflecting a higher percentage of mid to high tier product compared to the fourth quarter. Excluding highlighted items the operating loss in the quarter was $347 million compared to $204 million operating loss a year ago. The operating loss increased, as a result of lower sales partially offset by lower operating expenses resulting from our cost reduction actions.

With regard to the Mobile Devices portfolio, we began shipping six new products in the quarter including the ROKR U9 multimedia device in Europe, Latin America and Asia, and the MOTO Z9 feature phone in the US. We announced expansions to the MOTO Q Smartphone product line, which will begin to ship through several carriers during the second quarter. And recently we began shipping the ROKR E8 music device in Asia. Later in the quarter we expect both the E8 and Z10 multimedia devices to ship in Europe.

As we move forward on our portfolio improvements, clarity around our silicon and software platforms is fundamental to successful execution. In this regard I would like to share with you our direction in both of these important areas. First as you know, our multi-source silicon strategy was broadened with the announcement of our Qualcomm agreement in January. Our design teams are currently planning and integrating T1 and Qualcomm chipsets into our 2009 UMTS product portfolio.

On software platforms, the focus for our 3G UMTS devices in the mid-to-high tier will be centered around expanded use of our Symbian UIQ platform. We will utilize Linux Java on certain devices to meet 2008 customer commitments, and continue to support and invest in that platform for the longer term. In the low to mid tier devices we will leverage P2K, a proven low cost branded services enabled platform. This will allow us to discontinue investment in our other low tier platform after completing some near-term customer commitments.

So, as I look at the Mobile Devices business overall, and our priorities, we are focused on leveraging our talented employees, intellectual property, and design leadership to enhance our product portfolio, while managing our overall operating expenses. In the second half we expect more additions to the portfolio as compared to the first half, as we improve our new product introduction effectiveness and deliver our 2008 product roadmap.

In 2009, as we transition more of our devices to our improved platforms, we will deliver a broader and more innovative and competitive customer-driven product portfolio in which we will have lower cost devices and improved feature sets reflecting trends in music, touch, and messaging.

We will address a wider range of price points in key product segments. We will better utilize partnering to develop ODM solutions to address a broader set of market opportunities. Within improved product portfolio, we can leverage our strengths and distribution in brand across our key markets to reposition ourselves for success. Coming back now to look at the second quarter, in Mobile Devices we anticipate sales to be flat to slightly up sequentially and an operating loss comparable to the first quarter.

Turning now to Home and Networks Mobility, sales were nearly $2.4 billion, up 2% compared to the first quarter of last year. Excluding the highlighted items, operating margins was 7.3% compared to 8.6% in the first quarter of last year.

Our home portfolio delivers a personalized media experience to consumers at home and on the go. Our solutions also enable service providers to operate their networks more efficiently and profitably, by delivering new revenue generating applications and services to their subscribers. First quarter home sales were nearly $1.2 billion, up 12% year-over-year demonstrating continued strong demand, particularly for our HD and DVR devices

Operating margins in the quarter were lower compared to the first quarter last year, attributable mainly to product mix and a high level of transportation costs in the quarter. R&D expenses were also higher as a result of recent acquisitions. That said, we see near-term opportunities to increase the operating margin to improve manufacturing costs and leverage on sales growth.

Looking regionally compared to the first quarter of last year, sales in North America grew 10% and accounted for approximately 83% of total sales. Sales outside North America also remain strong and were up 25% led by growth in Europe and Latin America. In digital entertainment, we maintained our market leadership position with overall unit volume of 4.1 million devices. We have now shipped over 65 million devices to-date, including over 3 million IP devices.

We are also a leader in end-to-end video, voice and data network solutions for operators. Future demand will be driven by growth in services, including on-demand and personalized video, interactive TV, targeted advertising and advanced IP applications.

Our recent DOCSIS 3.0-based CMTS award from J:Com, a major customer in Japan is just one example of our leadership in this area. Overtime, we expect sales from this portion of our product portfolio to become a more significant contributor to overall results.

On the product front, this quarter we introduced several products that support our media mobility focus. These include the DCX series of multimedia hubs, capable of advanced video services and video storages and the DH series of personal mobile TV devices for on the go multimedia entertainment and navigation.

Finally, to support our international growth, we completed the acquisition of Dahua Digital. This acquisition enhances our digital entertainment device portfolio for the rapidly growing cable market in China. It also provides with improved time to market and a low cost solution suitable for other markets around the world.

Turning to wireless networks, sales in the quarter were over $1.2 billion. Excluding Embedded Communication Computing, a business we sold in December of last year, sales grew by approximately 2%. This reflects higher GSM sales, partially offset by lower sales of CDMA and iDEN.

We were again profitable in each of these technologies while we continue to invest in WiMAX and LTE. Overall, operating margin remained essentially flat with the impact of lower sales offset by the reduction in the cost structure of this business.

In mobile broadband, we made a number of enhancements to our WiMAX portfolio including new access point in Desktop CPE offerings. We remain a leading supplier of having now delivered over 3,600 access points and over 120,000 CPE devices to-date around the world.

In the quarter, we won a major contract in Saudi Arabia and registered our second win in Taiwan. This brings us to 80 engagements, 19 of which are for commercial systems with customers in 43 countries. We expect this to result in some initial WiMAX sales this year, as the first networks are commercialized and more significant sales opportunities next year and beyond.

Looking to the second quarter for the home and network's mobility segment year-on-year, we expect slightly higher sales and essentially flat operating margin. This reflects continued solid growth for home and lower wireless network sales.

Now, let's take a look at enterprise mobility solutions. Sales were $1.8 billion, up 5% as compared to the first quarter of last year. Sales of mission critical, government and public safety, equipment and services were nearly $1.3 billion for the quarter, up nearly 4% compared to the year ago quarter.

In the commercial enterprise verticals, sales of mobile computing, advanced data capture and wireless LAN were over $530 million, also up from the year ago quarter.

Excluding highlighted items, operating margins for the segment was 14.3% compared to 13.3% for the first quarter of last year. The improvement was driven by higher margins in the commercial enterprises and verticals.

Compared to the first quarter of last year, North America sales declined 6%. The decline was due to a large initial system contract with the US postal service that we began implementing in the first quarter of 2007.

Excluding the sale from last year's results, North America sales were essentially flat. Continued strong demand internationally is providing momentum for topline growth.

Outside of North America sales grew in aggregate by over 23% compared to the first quarter of last year and accounted for 45% of total sales.

In EMEA, sales grew by 25% compared to the first quarter of last year and accounted for 29% of sales. We're beginning to see the impact of the nine countrywide Digital Radio System awards won last year and continue the investment in homeland security.

In addition, we are experiencing strong demand for the MC70 and the new MC17 is gaining traction particularly in retail. We also secured wins with several new customers in the transportation and logistics verticals.

In Asia-Pac, sales grew by 33% compared to the year ago quarter and accounted for 10% of total sales. Retail, manufacturing and transportation and logistics verticals all performed well.

Results also include two months of operation from our joint venture with Vertex Standard. The joint venture opens up new market opportunities and will enable us to develop and deliver a broader suite of solutions to customers worldwide.

As we focus on sustaining our growth in Asia, public safety and transportation in logistics markets provide us with significant opportunity. We received our largest award ever in the region for a multi-year project valued at over $280 million for the Royal Malaysian Police, for their digital migration.

We also secured several competitive TETRA system wins with major international airport customers, in Europe and Asia. On the product side, we launched the CA50, a new Voice-over-IP scanning device aimed at the retail and healthcare markets. We also introduced a low cost all wireless LAN solution for midsized enterprises.

Looking ahead to the second quarter for Enterprise Mobility Solutions, we expect a year-over-year increase in sales and continued double-digit operating margin.

So in summary, we're actively engaged in pursuing our plan to create two independent publicly-traded companies. In Mobile Devices, we remain focused on our efforts to improve the product portfolio. Our intellectual property and design, coupled with improved platforms and execution will result in a broader based and more innovative consumer driven portfolio in 2009.

In Home and Networks Mobility and Enterprise Mobility Solutions, the teams are expanding their portfolio of solutions, executing well, growing internationally and delivering solid financial results.

And now, I'll turn the call back over to Dean to start the Q&A.

Dean Lindroth

Thanks, Greg. Before we begin taking questions, we'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)

Your first question is from Maynard Um with UBS. Please go ahead.

Maynard Um - UBS

Hi, thanks. I just wanted to touch on your guidance for flat revenue in handsets assuming flat or up ASPs. The new products in normal seasonal industry growth implies further market share losses. Can you just talk about your expectations? Are you are expecting the industry to be flat sequentially? Please talk about where in particular you're expecting to see further share pressure?

Greg Brown

We're expecting revenue to be flat to slightly up sequentially with the comparable operating loss for the quarter. I think that from a TAM standpoint we're expecting a very slight decline. I think you could kind of calibrate accordingly then overall between those reference points. We'll expect to see normal margin pressure on the existing portfolio to be offset by operating expense improvements, as well as the introductions of some newer products, which we'll be shipping later in the quarter.

Dean Lindroth

Next question, please?

Operator

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

Phil Cusick - Bear Stearns

Hi. I am following up on Maynard's question on the handset side. Can you talk about the product portfolio as you see it now? Do you expect of the new things that have been launched already that they're really starting to come through and shoring things up or is it just normalized and stabilized products that are out there on a quarter-to-quarter basis? And then for 2Q, have we seen the line up that's going to be out in 2Q and at what point do you expect that we're going to start seeing some more launches of a new lineup? Thanks. And then any update on the leadership enhancements would be great. Thank you.

Greg Brown

Yes. We introduced six new products, as you know, in Q1, three W series and iDEN device, 3G/UMTS and a GSM device. We expect more products in Q2 from a quantity standpoint, which is positive. As we transition from where we are toward the end of the year and into 2009, the other thing, I think, you'll see us do is pursue areas and gaps where we're literally not effectively competing today.

So we have a very embryonic 3G product portfolio, but you'll see us also expand the portfolio into some key areas around messaging and touch, some also lower cost devices that I think will round out the portfolio and make us much more competitive between now and the end of the year to position us for a stronger 2009.

In terms of the leadership search for Mobile Devices, it's progressing well. Obviously, it's a top priority of mine, and I'll update you when we have something specifically to announce. But I think it's progressing pretty well.

Phil Cusick - Bear Stearns

Okay. Thanks.

Dean Lindroth

Next question, please?

Operator

Thank you. Your next question is from Mark Sue with RBC. Please go ahead.

Mark Sue - RBC

Is $27.4 million the absolute bottom with all the new products that you have? I think it's 50 to 70 new phones for the balance of the year. Should we model a sharp decline in ASPs because the current portfolio is aging a little bit or are you still pretty disciplined in maintaining ASPs?

Paul Liska

I think our ASP in Q1 was basically a reflection of mix more around mid to high-tier. I think we continue to exercise some good discipline around pricing and pricing consistency and rationalize channel management. And again, I would expect in Q2 revenues to be flat to slightly up. And maybe I didn't mention this before, but the TAM will have a slight increase sequentially Q2 over Q1. So, that's kind of what we expect to see going forward.

Mark Sue - RBC

And you can say with confidence that maybe $27.4 million is probably the absolute bottom for Motorola?

Greg Brown

Yeah, obviously, as you know, Mark, we don't guide on the units, but I think you can get some overall context from the other guidance we are giving. Our product portfolio is only going to get stronger and we're going to compete in some key segment areas that we literally don't have products on the shelf board today. So, we absolutely understand what's required and look to grow over time.

Mark Sue - RBC

Thank you and good luck ahead.

Greg Brown

Thank you, Mark.

Dean Lindroth

Next question, please?

Operator

Thank you. Your next question is from Brian Modoff with Deutsche Bank. Please go ahead.

Brian Modoff - Deutsche Bank

Yeah. Real quick clarification on the TAM, you first said very slight decline and then you said very slight increase. Are you saying there is a very slight increase in the number of units you ship in Q2 from Q1? Please clarify.

Also, a question on UMTS product line. You had a product in Europe for 3G. Can you walk us through how many new products you'll have in each of the quarters for UMTS in Europe. Have you seen any impact from the macro environment on your PMR business? Have you seen any US government order slowdowns due to lower tax receipts? Thanks.

Greg Brown

Sequential TAM is a slight increase sequentially Q2 over Q1. Today we have about six UMTS products in the portfolio that are shipping today I think which are active. We will expect in Q2 to have three additional 3G products shipping in Q2, announced in shipping. So, that will enhance the portfolio.

From an overall macroeconomic standpoint we will continue to watch it pretty closely both North America and EMEA. I think EMEA, in terms of government contracts as you referenced on the public safety side, had tremendous momentum. Winning us a number of consecutive country wide digital TETRA system. The positive news around is that it provides a foundation by which we can then build out further footprint and then add subscribers over time for the balance of ‘08 and ‘09 in to the framework of infrastructure that has been installed there.

For North America, I think your question was on the government’s side. We did have a decline in our government and public safety business. I think when you normalize for some of the contracts, a period ago in Q1 it was generally flat, but we are going to watch that closely; because governments spending on lower and public safety systems is something we are just going to have to keep our eye on moving forward.

Dean Lindroth

Thanks, Next question, please?

Operator

Thank you. Your next question is from Mike Walkley with Piper Jaffray. Please go ahead.

Mike Walkley - Piper Jaffray

Hey, thank you. I was wondering if you could just follow-up on the outlook for slight growth. Are you seeing any pockets of inventory that affect that guidance in the handset side and then also on WiMAX with momentum you are gathering. Could you help us size the market, maybe how big you see the total addressable market maybe in '08 and '09?

Greg Brown

In terms of inventory, I think it's generally comparable in Mobile Devices. So, from period-to-period, it's reasonably flat. Stock in channel is further improved sequentially as well. In terms of WiMAX, and 4G in general our momentum is strong. We’ve got as I referenced lots of WiMAX interest, clearly we continue to support Sprint and Clearwire here domestically, but internationally we've got tremendous interest in WiMAX, in a variety of International Theaters and Applications.

And the architecture that we are building with the investments we are making in 4G, have a high level of reusability between WiMAX and LTE, which I think will lend itself well to business case return in the future as well. In terms of addressable market, hard to say at this point, it's still evolving. We've said that we don't expect materiality from a WiMAX financial contribution in 2008. I think we'll give you updates in 2009 as it comes.

Dean Lindroth

Thanks. Next question, please?

Operator

Thank you. Your next question is from Ehud Gelblum with JPMorgan. Please go ahead.

Ehud Gelblum - JPMorgan

Greg, thanks for giving us the sense what even the TAM is going to do next quarter. If you can give us a sense as to what you think first of all the entire handset market is going to do for the year and what you kind of base in that on and then foreign exchange I'd appreciate it. Clearly the dollar has moved a lot in the negative direction over the last three months.

Your ASP actually outperformed I think most people are expecting. Can you give us a sense of to how much? I understand that a good mix shift going on in your product portfolio, but how much did that foreign currency possibly help your ASP? How much can that kind of keep things maybe a little afloat as you go through the rest of the year?

Can you give us a sense as to what percent of your phone this quarter were 3G? WCDMA was probably small play, but what percentage that was when you expect to go as you get your unit product portfolio in the end of the year? Thanks.

Greg Brown

Ehudy, in terms of your last question first. The contribution from WCDMA in Q1 was really small. So, that's first and foremost. From an overall TAM perspective on an annualized basis, we're looking at double-digit, low double-digit range and planning that accordingly on foreign exchange. I'll actually turn it over to Paul.

Paul Liska

Yeah, just a level set everybody, the sales mix shift in the company's level is about 50-50 US to non-US. Importantly though, outside the US we still do a lot of our business in US dollars or in currencies that have not had much volatility to the dollar. So, actually the foreign exchange impact that we have is relatively insignificant.

Dean Lindroth

Thank you. Next question, please?

Operator

Thank you. Your next question is from Tim Long with Banc of America. Please go ahead.

Tim Long - Banc of America

Thank you. Back to the handset side, you talked about, I think, 17% of units coming from the Asia-Pacific region. That's obviously below the mix for the overall industry and lot of the growth is coming from there. Could you talk a little bit about the plans to recover the business in some of the key regions like China and India? What's the go-to-market strategy, is it distribution issue, it’s a product issue, and what are the kind of the focal points to improve in those really high growth areas? Thank you.

Greg Brown

Asia represents a fantastic opportunity for us, China specifically. I think it's a combination of product refresh and localized customer requirements pen-based product, touch product. We had great success with the MING. I think you'll see us add on some nice product additions sooner rather than later, that fill out the portfolio that hit us absolutely squarely on a very growing addressable market opportunity in China and capitalize on the go-to-market infrastructure that we have there as well as our brand leverage.

India is the same thing. We have a number of products in retail distribution points. That's more of about a product refresh and adding lower W Series phones and increasing ODM partnerships to allow us to more effectively compete on lower price points and I think that India is another opportunity that clearly from just a volume standpoint will allow us upside opportunity to compete with the existing infrastructure investments that we've made there and you'll see us look to do that.

Dean Lindroth

Next question please.

Operator

Thank you. Your next question is from Jeff Kvaal with Lehman Brothers. Please go ahead.

Jeff Kvaal - Lehman Brothers

Yes. Thanks very much. My first question Greg, could you give us a sense of how we should expect the timeline to develop for decisions about how the split will unfold, i.e., where the brand will go and how the capital structure will unfold?

And then, secondly, the Qualcomm and TI chipset phones, are they going to be out in 2008 and then impact in 2009 or are you saying they will be out in 2009? Thanks.

Greg Brown

Yeah. So in terms of the separation of the two independent companies work is well underway, teams launched a whole host of different cross functional initiatives and outside advisers. There are many issues to wok through around intellectual property, in brand, in financial, in tax and regulatory. I think that will take several months for us to work through. And as we've talked about and referenced, we don't expect the separation to be until some time in 2009. Your second question was what again?

Jeff Kvaal - Lehman Brothers

You had suggested that the Qualcomm and TI chips.

Greg Brown

Yeah. Right. Obviously, we use Qualcomm in our, throughout our CDMA portfolio, TI does all of our ODM phones to-date. We're building Qualcomm and TI into our UMTS portfolio product for 2009. Just as a reference point, as a footnote, we're shipping this quarter a Qualcomm chipset on a UMTS phone in Korea which is positive. We will look to have those chipset designs in our portfolio as soon as we can. I think the progress is progressing well, and the partnership between those two firms is going as expected.

Jeff Kvaal - Lehman Brothers

Thanks.

Dean Lindroth

Next question please.

Operator

Thank you. Your next question is from Ittai Kidron with Oppenheimer. Please ago ahead.

Ittai Kidron - Oppenheimer

Thank you. A couple of question from me, first on to gross margins, you've actually did a decent job in keeping that flat, roughly flat for the last three quarters. Can you give us a little bit more color to what extent that reflects just a pure cost cutting? And given what you plan to introduce and your plans over the next couple of quarter, did that gross margin start moving up or do you still expect it to remain roughly where it is?

And a second question, could you give us a little more color into the increase in inventory? It's a little bit concerning. From a seasonal standpoint, I would have expected a step down, so if you can give us more color on the breakdown of that between the different units and why it went up? Thank you.

Paul Liska

Yeah. First, from a margin perspective, again, incorporated into our Q2 guidance, we are having and we'll have some normal margin pressures on the existing portfolio, but that pressure is offset by the operating expense improvements we're making. As we introduce some of the newer products, both later in the quarter as well as later in '08 and in 2009, we would expect them to have more positive financial contributions in the overall mix. In terms of inventory--

Greg Brown

Yeah. Inventory was up in total about $100 million primarily due to the acquisition of Vertex and field inventory related to GSM and WiMAX networks. Mobile Devices was relatively flat. I think importantly too with regard to your question, as far as any concern about our inventory and the level of inventory in Mobile Devices are E&O reserve basically the percentage, as a percentage of inventory is comparable to what it has been the last six quarter. So we don't see a concern there at this point.

Ittai Kidron - Oppenheimer

Thank you. Good luck.

Dean Lindroth

Thank you. Next question.

Operator

Thank you. Your next question is from Jim Suva with Citigroup. Please go ahead.

Jim Suva - Citigroup

Thank you. Can you talk a little bit about your manufacturing and distribution scale issues? I guess the concern is why don't you use ODM a lot more to get products more timely out the door and are we in a little bit of a dispiral on the Mobile side. Your cost manufacturing footprint doesn't equal your market share. You don't have the volumes going through that to get the losses to decline. Why aren't you using ODM more? How should we think about your cost footprints versus your market share issue?

Greg Brown

On supply chain, as we've talked about, just the overall absorption rate reflective of our current volumes, we're aggressively taking steps to optimize it. As you saw, we announced just a few weeks ago, a facility consolidation in Asia, specifically Singapore. So, we will consistently look to rationalize and optimize the overall manufacturing footprint to your point to be reflective of volumes.

I absolutely agree that part of that also will be the increased utilization of ODMs, not just from a time to market standpoint, but from a financial contribution and the economic efficiencies that are extended to us in the mix of our ability to do that. But I would also say that Rita and her team as well as the Mobile Devices team were being pretty thoughtful and pragmatic in the planning assumptions around supply chain, realistic around the absorption rates and what's reflected in Q2. And as we model this business and manage it going forward and improve it financially, supply chain is obviously an opportunity in top of mind from where we are and where we need to go.

Jim Suva - Citigroup

And do you think Q1 is really the worst for mobile right now as we sit here today that this is kind of the worst for year-over-year, quarter-over-quarter profitability that this is really the worst of it right here?

Greg Brown

Well, I would point you to our Q2 guidance as kind of a reference point for that. And obviously, unlike last quarter, as we talked about what we expected in Q1 and guided accordingly and came in within the EPS range, we are suggesting that revenues will be flat to slightly up and we'll have more new products introduced in Q2. So, it's all about building momentum.

Jim Suva - Citigroup

Thank you.

Dean Lindroth

Thanks. Next question, please?

Operator

Thank you, your next question is from Richard Kramer with Arete. Please go ahead.

Richard Kramer - Arete

Yeah. Thanks very much. I'd like to ask a couple of questions about the cash flow, maybe Paul. Could you walk us through what happened in the decline in Sigma Funds and whether the $631 million that we saw on the cash flow statement? Was it allocated to non-current assets? And also the $276 million payment to Freescale, was that made or cut up as a sort of new form of amended contract or deferred? Can you walk us through where we might have seen that?

Greg, can you give us any sense of what the total cost of the separation with all the legal and HR and accounting and whatnot is going to cost, because it's obviously a very complex process, and maybe you have an idea what the total end cost of that might be?

Greg Brown

Okay, listen. First, with regard to the Freescale settlement, yes, that was the payment. It was actually a cash payment to them.

Secondly, I think it's important and I'm glad you asked about what was going on with the Sigma Fund. I want to assure everybody that the asset class mix hasn't substantially changed versus yearend. 96% of the fund is currently rated A or better and 99% of that fund is investment grade. What happened really is due to the credit market dislocations we're seeing, we classified $673 million to non-current as we don't expect to use the proceeds for operating purposes in the next 12 months. So basically that explains why we shifted it like that.

Richard Kramer - Arete

Okay.

Dean Lindroth

Next question, please? Sorry, Richard.

Richard Kramer - Arete

Do you have any sense of the total cost of separation? It's obvious that it's going to be a massive exercise. You've mentioned some stuff about the restructuring and separation payment, but what will be the total cost in your view of separation be for Motorola to undertake this whole effort?

Greg Brown

We don't really have your rate. It will be a large number at the end of the day, but there is so much work to do with regards to citing on the brand, the intellectual property, the assets, et cetera, that at this point in time we just can't tell you what that's going to be. As we move further down the road and we start to effect this change or understand better what exactly it's going to mean for these two separate entities. We'll update you with regard to what to expect cost-wise.

Richard Kramer - Arete

Okay. Thank you.

Dean Lindroth

Next question, please?

Operator

Thank you. Your next question is from Scott Coleman with Morgan Stanley. Please go ahead.

Scott Coleman - Morgan Stanley

Thanks, guys. Good morning. First a question on the cost savings. Paul, can you just confirm that we should be looking at about $9.1 billion exiting 2007 and a level of $1 billion below that for all of 2008 from a modeling perspective, and could you help us understand the mix of cash versus non-cash expenses, like D&A within that?

And then, second, for Greg, obviously walking down the path to structural separation, but are there any elements out there that would actually change your mind at this point, whether it was the cost or the difficulty or a view that these businesses actually could do well being under one roof? What are the considerations that would alter this path at this point?

Greg Brown

I'll just take that one first. I mean, we are absolutely on the path of creating two new businesses and continue to believe that that's absolutely the right thing to do for a whole host of reasons around focus and alignment and the structural efficiencies that will be afforded for those respective businesses, which were quite different to increase their competitive effectiveness.

So, we don't talk a lot about Broadband and Mobility Solutions and the other groups, but obviously, I think they are doing a fantastic job and have category leadership across many dimensions of the areas that they compete and they're being managed well, as well as we're reinvesting in the product portfolio to expand and grow their respective segments.

And on Mobile Devices, there is an acute level of focus and enhanced operational improvements that are being made. We have talked about the silicon and platform decisions and actions that have been taken and we are implanting. And I’m excited about the portfolio, both in quantity as well as category as well as experiences of what that will grow to be over the next several quarters. So, I think that independent entity for Mobile Devices will be very competitive, effective and competing moving forward as an independent organization.

Paul Liska

And thanks for asking about the cost reduction and the cash question. I’m going to first handle the cost reductions. What we wanted to do is because at different points in time, it was added with regard to what we expected and so wanted to take you through one last time, where you should see these coming through? So, in 2008, as I said in the script that we had, SG&A, you should see $540 million, R&D $240 million and cost of goods sold $220 million.

I'd like to a little bit redirect your question, because I think anticipating that there might be some questions with regard to cash burn or whatever you want to call it. There was a reduction and so I’m not going to get into specifically with regard to the cost reduction, what part of it cash, no-cash etcetera. What I rather do is, redirect the question toward the cash burn issue.

As you saw there was actually an $844 million reduction in gross cash. I took you though the major pieces of that, I'll repeat it, again it was the Freescale settlement acquisitions, share repurchase, dividends, debt repayments and CapEx. Having said that, operating cash flow was a negative of $343 million primarily due to the Freescale settlement.

Having said that, I think this is important, despite the difficulties we're currently experiencing in Mobile Devices. We generate a number, a significant amount of cash from those other businesses and I think its important for you to know and this gets again directly to the cash burn rate, we expect the net cash balance in 2008 to be comparable for the net cash balance in 2007.

Dean Lindroth

Next question please?

Operator

Thank you. Your next question is from David Wong with Wachovia. Please go ahead.

David Wong - Wachovia

Thank you very much. Can you help us understand your cost cutting assets, do they help the operating margin of your Enterprise Mobility at [Herman] network division as well or are essentially all of them in the Mobile Devices division. And can you remind us if you've given any long-term operating margin targets for these are the two divisions.

Greg Brown

I think our cost reduction efforts are on the operating margin or operating expense are broadly across overall Motorola and all of the segments as well as the corporate organization as we look for overall effectiveness and efficiency. In terms of longer term or the guidance that we talked about for Q2, we're expecting home to have solid year-on-year growth and networks to have effectively excluding Embedded Communications Computing, flat sales.

Enterprise Mobility would have sales up year-over-year in Q2 with continued strong double-digit operating margin and Mobile Devices; we talked about in terms of comparability from a OE loss standpoint with revenues quietly slightly up.

David Wong - Wachovia

Well, thanks.

Dean Lindroth

Next question please.

Operator

Thank you. Your next question is from James Faucette with Pacific Crest. Please go ahead.

James Faucette - Pacific Crest

Thank you. Paul, you didn't anticipate part of my cash flow question, I appreciate that color. I guess one of the follow-ups in achieving the similar cash balance at the end of 2008, the 2007. Do you expect you will have slow considerably? Your share repurchases have been pretty aggressive in the last year. And that’s my first question.

And then second question just to look a little bit at some of the businesses that are generating cash. Enterprise Mobility. It seems like that would be an area of potential concern in a slowing macroeconomic environment. Can you talk about what we have seen there in terms of impact from the economy and what your outlook generally is for how that will be able to sustain up during a slower period? Thank you.

Paul Liska

Okay, what I’m going to handle the buyback question and then I’ll turn it back over to Greg for Enterprise Mobility. But obviously we never comment on the amount of timing of share repurchases. As I said we bought 9 million shares in the first quarter at an average price of $15.30, the total cost of that was $138 million. We currently have remaining $3.6 billion and our share repurchase program. Having said all this, we’re always looking to optimize our capital structure.

Greg Brown

Yeah, in terms of the economy environment for overall and your reference was Enterprise Mobility. We are pretty pleased with the performance of that segment, considering that the environment we are in. As we mentioned, we are watching North America very closely, we will watch the public safety spending particularly at the low end in North America. We have to keep our eye on that.

That said in the Mobile Computing area, a lot of what we do, even though it’s a reasonable density of retail has pretty good if not very good life cycle economic savings to our respective consumers.

So, as we sell wireless LAN infrastructure or Mobile Computing Solutions, it's all about lifecycle economic savings to them, in terms of better inventory utilization, real time inventory, shelf space, the connection of front office and back office. So, I think that, it's a set of products and solutions within that Mobile Computing segment that continue to perform pretty well.

The other nice thing about Enterprise Mobility and that segment is they are getting strong growth internationally to balance overall from the diversification and a mix standpoint. So, we'll watch it and continue to watch it for Q2, but it's a pretty solid segment that, I think continues to do quite well overall.

Dean Lindroth

Next question, please?

Operator

Thank you. Your next question is from Mark McKechnie from AmTech. Please go ahead.

Mark McKechnie - AmTech

Thank you. I appreciate it. I appreciate your update on the leaders search for handsets. You know in the meantime, Greg, are you making any big strategic decisions and could you help us how you are setting it for a new leader, but I'd like to get a sense for how you're trying to focus on the low end, the high end, smart phones or geography, anything you could say to there. Help us out with how you're dealing with the transition?

Greg Brown

I think we're making a number of decisions and actions. We've talked about implementing Qualcomm and TI to give us the silicon optionality. We've referenced the fact that we're simplifying and taking specific decisions and actions on the software platforming.

We are building product and capitalizing on industrial design and form factor. But we are also pursuing categories around messaging and touch and lower cost devices that have a very embryonic portfolio today. I think, in addition to that, we're looking to leverage our global engineering that we have, our existing scale, our go-to-market distribution, our relationship with customers and carriers as well as the investments we made in retail.

So we're not looking to play small ball here. We're looking to get operating leverage back and fill up that product portfolio that allows us to then get the operating leverage that I think everybody is looking for to get the growth trajectory back. We are leveraging our intellectual property in the brand and other existing investments that have been made. I think gave us tremendous opportunity to do that.

Mark McKechnie - AmTech

Thanks, Greg.

Dean Lindroth

Next question, please?

Operator

Thank you. Your next question is from Tavis McCourt with Morgan Keegan. Please go ahead.

Tavis McCourt - Morgan Keegan

Thanks. Just a couple of clarifications. On the $673 million re-class on the Sigma funds, can we assume those are auction rates or some kind of liquid securities? And can you talk about have there been any write downs in the Sigma funds either this quarter or the previous quarters?

Greg Brown

Yeah. First of all, there haven't been any significant write downs. Secondly, it isn't that they aren’t monetizable. What it is that, we're going to hold this security to their schedule at this point in time unless the pricing changes. We're going to hold on to their schedule redemption date and fully recover their respective principle investments.

Tavis McCourt - Morgan Keegan

Got you. And then I wanted to follow-up on a question before in terms of the in-house manufacturing on the handsets, roughly what percentage of the handsets now are manufactured in-house versus ODM? And can you talk about the capacity utilization at this point and where you'd expect that to be maybe by year end?

Greg Brown

I think today roughly 40% and we'll verify, I think 40% of our handsets are manufactured outside Motorola. And to the earlier point, we will always look to optimize and improve the overall economics so that makes some contribution. As we get updates to that, we will keep you informed accordingly in terms of any decision within that supply chain mix and balance.

Tavis McCourt - Morgan Keegan

And in terms of the capacity utilization of the in-house manufacturer?

Greg Brown

I don't know the specific utilization, maybe, Dean can follow-up or give you some guidance offline but utilization or capacity is not our issue obviously. It's getting the requisite fill and as we increase the number of products and load balance, the footprint, I think that will improve clearly between now and over the next several quarter.

Tavis McCourt - Morgan Keegan

Great. And then you mentioned before that you said, channel inventory, I think were similar exiting Q1 as they were in December. I just want to confirm that, you expect your sell through you think was roughly about $27.4 million in the quarter as well?

Greg Brown

Stock in channel actually improved sequentially, overall quarter-over-quarter.

Tavis McCourt - Morgan Keegan

Great. Thanks a lot.

Dean Lindroth

Yeah. Next question, please?

Operator

Thank you your next question is from Bill Choi with Jeffries. Please go ahead.

Bill Choi - Jeffries

All of my questions have been asked. Thanks.

Dean Lindroth

Next question, please?

Operator

Thank you. Your next question is from Mathew Hoffman with Cowen. Please go ahead.

Mathew Hoffman - Cowen

Yeah. Hi. Question on the Qualcomm relationship, Greg, you seemed to be pointing the 2009 for its arrival and other the technologies. But I was hoping for some color on the software side. Specifically, do you anticipate being able to use both the Symbian UIQ and the Linux Java, a less is on the Qualcomm chip or so do you anticipate that being primarily a Microsoft family of product? And also, if you could give us any thoughts on with regard to the split of the Motorola brand and IPR, as the company gets ready to separate? I'd appreciate it. Thanks.

Greg Brown

Yeah, just on Qualcomm again, for clarification. We are shifting a Qualcomm chipset on a UMTS device this quarter. We're building Qualcomm chipset into the UMTS portfolio for 2009, but we're also going to look for Qualcomm chipsets in an ODM environment. And that may afford us some opportunity by the end of the year, if not early 2009. In terms of Symbian UIQ and the mid-to-high tier devices that we're focused on around that that is oriented around a Freescale chipset device now. And we will look to leverage that in transition consistent with our multi-source silicon strategy moving forward. I think it will have TI and Qualcomm for UMTS product portfolio optionality in 2009.

Dean Lindroth

Thanks. Operator, we'll take our last question.

Operator

Thank you. Your final question is from Samuel Wilson with JMP Securities. Please go ahead.

Samuel Wilson - JMP Securities

Good afternoon. Good morning everyone, just given the cash burn and the buyback and the read classification and some of the things. Can you just talk about the safety that dividend at this point?

Greg Brown

Yeah. I mean, we wouldn't normally talk about what we're planning and doing. But at this point in time, if you asking about it in the context, do we have enough cash to pay it, and continue paying dividend? The answer is yes.

Samuel Wilson - JMP Securities

Do you think that's a wild use of capital at this point given the restructuring and the costs associated with splitting the company?

Greg Brown

I think that we won't comment further on what we're going to do in the future with regard to the dividends.

Samuel Wilson - JMP Securities

Thank you.

Dean Lindroth

Thank you.

Operator

There are no further questions. I will turn the floor back over to Mr. Dean Lindroth, Corporate Vice President of Investor Relations for any additional or closing remarks.

Dean Lindroth

During this call we 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 second quarter of 2008; expectations for costs savings from the Company’s ongoing reorganization activities; guidance for future sales; operating margins; profitability; ASPs or market share for each of Motorola's segments;, benefits to be realized from the company's ongoing efforts to improve our cash conversion cycle; benefits to be realized from Motorola's Mobile Devices ongoing silicon and software initiatives; and expected additions to the Mobile Devices product portfolio; the impact on Motorola's performance and financial results from strategic acquisitions and divestitures, including those that are recently completed, those that are pending and those that may occur in the future; the expected timing for the announcement, launch and shipments of new products; ongoing effect of income tax rate; the impact of a slowing economy on customer spending; the expected timeline for the separation of the company into two independent publicly companies; cash generation and net cash balances; and plans regarding our dividend.

Because forward-looking statements involve risks and uncertainties, Motorola's actual results could differ materially from those stated in the forward-looking statements. Information about factors that could cause such differences can be found on this morning's press release, on pages 18 through 27 in item 1A of Motorola's 2007 annual report on form 10K and in Motorola's other SEC filings.

This now concludes our call.

Operator

Thank you. Ladies and gentlemen this does conclude today's teleconference. The presentation material, and additional financial table, will soon be posted on Motorola's Investor Relations website. In addition, a replay of this call 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. Have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Motorola Inc. Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts