Motorola Q3 2005 Conference Call Transcript - Prepared Remarks (MOT)

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Here's the entire text of the prepared remarks from Motorola's (ticker: MOT) Q3 2005 conference call. The Q&A, which followed the prepared remarks, is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we'll incorporate your corrections. And please note: we have paid to have this conference call transcribed, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Operator: Good Afternoon. All lines have been placed on a listen-only mode until the question and answer segment of today’s call. I would also like to inform everybody that today’s call is being recorded. If you have any objections, please disconnect at this time. I would now like to introduce Mr. Ed Gams Senior Vice President and Director of Investor Relations. Mr. Gams, you may be begin.

Ed Gams, Vice President and Director of Investor Relations

Good afternoon everyone with me in this call are Edward J. Zander Chairman and Chief Executive Officer of Motorola, David W. Devonshire Executive Vice President and Chief Financial Officer, Brain Gerics Executive Vice President and President of Mobile Devices Business, Gregory Brown Executive Vice President and President of Gov. & Enterprise Mobility Solutions Business and Dane Maloney Executive Vice President and President of the Connective Home Business. All of whom will be participating in the Q&A portion of this call. An Internet slide presentation is accompanying this conference call. The presentation can be viewed by the visiting the slides will be advanced automatically as our presentation proceeds.

We strongly encourage you all including those listening on the telephone to also view these slides while you listen. A replay of this webcast including the questions and answers will also be available on our website at approximately 8 pm central time today. A number of forward-looking statements will be made during this conference call, 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 these expectations will prove to be correct because forward-looking statements involve risks and uncertainties Motorola’s actual results could different materially from these statements.

Information about factors that could cause and in some cases have caused such differences can be found in today’s earnings press release on pages 70 through 80 of Motorola’s Form 10-K for the fiscal year December 31, 2004 and Motorola’s other SEC filings. This conference call is occurring in the afternoon of October 18, 2005. The content of this conference call contains time sensitive information, but is accurate only as of the time of this live broadcast. If any portion of this conference call is re transmitted at a later date, Motorola will not be reviewing or updating the material that is contained here in. This conference call is exclusive property of Motorola Inc. and any redistribution, retransmission or rebroadcast of this call in any form without expressed written consent of Motorola is strictly prohibited. Now I would like to introduce Ed Zander.

Edward Zander Chairman and Chief Executive Officer of Motorola

Thanks Ed and good afternoon everyone. It’s a beautiful summer day here in Chicago actually it is Fall day here in Chicago, but it feels like summer. In fact we are all sitting here in our conference room with our White Sox rally caps, yes I did change colors and am leaning from First World Series in 46 years. I hope all of you back in New York and Boston will be rooting hard for the Sox this year. It’s been a long time and it has probably been a long time since Motorola has had a quarter like the recent one, which is Q3. We are very pleased with our results so, I want publicly thank all of our hard working employees worldwide who are responsible for making it happen.

We continue to profitably grow market share with great products and increasing levels of customer satisfaction. Our quality of earnings as measured by only ratio continue to improve quarter-over-quarter and year-over-year. And in addition our vision of CMOS mobility has continued to be embraced by our customer worldwide. Let me give you some key take ways for the quarter, David will talk about financial in a minute. First we had record company’s sales for any quarter $9.4 billion up 26% from a year ago. Second, we had record profit dollars for any quarter. Third, we achieved a new company milestone for quarterly operational margin, 12.6% that excludes significant items. We now had been above the 11% only for three of the past four quarters. Earning per share including significant items is up 67% from a year ago. We are neck-to-neck cash for Motorola $8.4 billion after repaying a billion dollars in debt and buying back 350 million more stock.

We generated over $1 billion in operating cash flow, 19 consecutive quarter of positive cash flow. We actually had record mobile device sales and unit shipments, year-to-year we had 38.7 million. Our market share is up 5.5% from this time a year ago and 1% quarter-over-quarter to 19%. Our mobile devices hit for the first time in a very long time a 11% only excluding the organization charges. We see more growth ahead.

Our guidance for Q4 revenue is above this mornings press call consensus. As for the few other things, our supply chain initiatives are going according to plan. You probably some of this consolidation activity this past quarter we are very pleased with the progress the team is making. We also had significant good new key people this year. One on this CIO Patricia Morrison, we also weighted some very senior marketing talent and in the technical area.

Our brand is strengthened and I do have to point out that our Chief Marketing Officer Geoffrey Frost is nominated as one of the ten best marketing chiefs in North America. In summary, it was a great quarter, now we get to do it again in Q4.

Mr. David W. Devonshire Chief Financial Officer and Executive Vice President

Thank you very much Ed. As Ed indicated we had a very-very strong quarter in earnings growth and record sales, sales were up approximately 26% first is the strong Q3 in 2004. Earnings per share results from continuing operation were $0.69 per share compared with $0.18 per share in Q3 of 2004. Our earnings per share include several significant items shown here and listed in our press release, which aggregates to a combined impact of $0.39 per share of income. Earnings per share for Q3 2004 included several significant items also shown here and listed in our press release, which, aggregate to a combined zero impact per share of income.

Excluding these items from our results, earnings per share in the current quarter would be $0.30 up our growth in 67% versus last year’s demonstrating excellent earnings leverage on our sales growth of 26%. Looking at our sales trend for the first three quarters of the year, you can see that we have continued to achieve solid top line growth the 26% sales growth of Q3 brings our year to date sales growth to 17%. Our guidance per sales growth in Q4 is of a similar rate to our year-to-date growth rate.

Gross margin was down 220 basis points from Q3 last year but decrease in gross margin percent versus prior year is largely attributed to our mixed shipment sales through the mobile device business, which has the lower gross margin than the corporate average as well as an increase in low tier unit sales within the mobile device segment. Mobile devices in Q3 ’05 represented 59% of our total sales up from 53% in the third quarter of 2004. In R&D, we continue to increase our investment in our future with R&D spending higher on a year-over-year basis. However, R&D decreased as a percentage of sales by 120 basis points to 9.1% from 10.3% due to our strong sales growth.

We continue to believe that measuring R&D as a percentage of gross margin is a better way to determine the effectiveness of R&D’s spending. As you can see from this chart we improved on this specimen by 170 basis points from the third quarter of last year. SG&A expenses - we continue to make very good progress in reducing SG&A as a percentage of sales. It is the G&A portion that is declining while we continue to invest in sales and marketing efforts.

Reduce in G&A expenses as the percentage of sales and in absolute dollars remains an area of focus for us. The G&A portion of SG&A for the third quarter of ’05 was down 16% from the third quarter of ’04. Another measurement we look at to measure productivity is revenue per employee on per quarter rolling average basis. Here again you can see the continuous improvement that we’ve made. Our revenue per employee has improved over 45% since 2003 and we remain focused on making further productivity improvements in the future.

Looking at our operating earnings trend, our operating margin continues to show steady improvement on a year-over-year basis. In the quarter operating margin rose 310 basis points compared to Q3 last year. It’s been many year since we generated over 11% operating earnings in the third quarter. In fact we generated over 11% operating margin in 3 of the last four quarters. Excluding the $91 million reorganization charge we incurred in the third quarter, operating margin would be 12.6%. On a year-to-date basis operating margin excluding reorganization charges would be 11.6%. We continue to make steady progress towards achieving our long term operating margin goal of 13% to 15% while at the same time growing faster than our competition.

Cash flow, our cash flow performance in the quarter was outstanding. We generated $1.1 billion in operating cash flow and 19 consecutive quarters of positive operating cash flow. Capital expenditure was approximately $200 million, giving us free cash flow of approximately $900 million. During the quarter we have reduced our gross debt by $1 billion and we also repatriated approximately $4.5 billion in cash to the US and a tax benefit of $251 million. Our debts in total capital ratio has now decreased to 21.5% from 28.4% at the end of 2004 making great progress towards our goal of less than 20% by the end of the second quarter of ’06. We ended the third quarter at $8.4 billion net cash positive up $900 million during the quarter and up $3 billion year-to-date in 2005. To give you a full update on share repurchase program, as you recall back on May 19 we authorized a $4 billion repurchase over three years.

During the third quarter we purchased approximately 16.6 million shares at an average price of $21.29 and up to date we purchased approximately 25.7 million shares from more than half of billion dollars. Our guidance for 2005 we are working at sales in the fourth quarter of between 10-3 and 10-5 up 16% to 19% versus the fourth quarter of ’04 and EPF of $0.32 to $0.34 per share. Our fourth quarter tax rate is estimated at 36% and the number of outstanding shares is forecasted at a level at about the same level as the third quarter of 2005. I would like to just give you few comments, regarding 2006 and as much as it was, a lot of unusual activities that occurred in 2005. First expensing our stock options begins as you all know in the first quarter of 2006. Our estimated annual impact is between $250 and $300 million spread fairly evenly by quarter. Second you know we have had significance gains from investments, from the sale of investments in the first quarter, second quarter and third quarter of 2005. We don’t anticipate this to occur again in 2006. Third as you model the first quarter of 2006 just keep in mind at the first quarter of 2004 and 2005 both represented slightly less than 20% of our annual EPF, excluding the various significant items we have highlighted in each of our operating earnings releases.

Lastly our estimated tax rate for 2006 was round about 36% comparable to the 2005 actual full year tax rate, excluding the various significance items we highlighted in our earnings release. Thank you very much and now I’ll turn the meeting back over to Edward.

Edward J. Zander Chairman and Chief Executive Officer of Motorola

Thanks David, I am going to take you relatively quickly through each of the businesses and then we will get on to your questions. First Q3 mobile devices as I said earlier Ron and his Team just knocked the cover off the ball in unit sales, operating earnings and market shares and every area that we measured. In term of what were the overall highlights, many of you ask me what’s after RAZR and the answer is more RAZRs. We are just getting started. It is the best selling clamshell in the world. Units per RAZR doubled again, we sold more than 6.5 million in the quarter alone. Remember last year I think for the entire year it was around three quarters of a million. I can’t think of another iconic device in the entire electronic space that has sold more in one quarter.

We launched 13 new handsets during the quarter including Rockaway One with iTunes, three GUMTS units were up more than 40% versus the prior quarter and iDEN business just had a great quarter with record performance and we won another GSMA award and it is upping its pole position in the high growth markets and I’ll talk more about that in just a few minutes.

In terms of market shares, now 19% global share clear number two and weaning. Strength is unmatched in North America we strengthened their, strengthened Latin America, number two in Europe, number three in North Asia with number two in China and number three in high growth markets with a specific attack plan in India. The numbers I think you have seen from the press release sales up 41% year-over-year, operatings are up 52% year-over-year, operating margins in double digits at 10.7% on a GAAP basis if you factor out one time charges for supply chain in the organization, the mobile devices margin is a 11% which is just really great in terms of where we come from over the past several years. Unit shipments are up 66% significantly outpacing all major competitors. We ship 44% more than the number three competitor during Q3 and we expect that gap to wind in Q4. In 38.7 million units we ship more than number four, number five combined for the quarter. Market share is up both year on year and sequentially. We estimate our present position as I said earlier at 19% on a total climb of over just about 205 million units for the quarter.

In terms of the Global share and market share I think I covered some of this but I am going to go through each of the geographies. In North America we are clear number one, in three out of four top levels of operators we are now reaping 33% market share units up 12% and 50% versus last year. We expect RAZR to move into CDMA in US and PEBL and SLVR were launched this quarter and we are focusing as you can see here in expanding our CDMA and continuing to strip from the brand.

Latin America, kind of the same story. We are number one in the market, number one in Venezuela, Argentina, Brazil we gained five points if share in Mexico and this was a tremendous quarter for Latin America. We doubled the volume up Q3, 2004 RAZR the D170 and C115 are some of the hottest brands in that space.

Europe, number two and growing. It is the best quarter ever with RAZR the clear winner. 14% market share 4 points over Q3, ’04 expect further gains here also with SLVR L6 and PEBL V6 this quarter continuing to build brand in sheer here too. North Asia we are up 19% versus Q2’05 and 12% versus Q3 ’04. RAZR is ahead across the region where GSM is number one mid tier in China. We now have the number one CDMA product, the RAZR in Korea, D70 is number one PDA in China and here again our focus on retail and distribution is beginning to deliver results. We are excited about our prospects of moving forward in this important area of the world.

And finally an area that I have been spending some time on together with Rod and the management team in the high growth markets. I always talked about connecting the rest of the world, tremendous opportunity not only for low-end devices but all of our product lines. We are building a position across cost-to-price tiers, we are leveraging our role in the GS&A drive to connect the unconnected. Our demand is huge financial level such as the C115 has a tremendous and a great market for mid and high tier products such as RAZRs. So we are building our position. India is a particular area that we have focused on and expect to see great things in 2006 as we penetrate the Indian market.

In terms of units and ASP’s, ASP’s were flat when comparing to Q3, 2005 to Q2, 2005. Unit shipments will up across all technologies. GSM units comprised again more than 70% of all Motorola units shift, yet another quarter over 50% in sequential increase with low share volumes. We improved market share, operating earnings and operating margins for Q3, 2005. We expect the sequential increase in operating earnings and margins during Q4 and deliver solid ASP performance as a result of new products introductions. And going to channel of inventories during Q3 our world wide channel of inventories continue to below industry averages. In terms of products there it is again RAZR its hot its all over the world. We expanded the availability to consumers by launching our CDMA version for China, RAZR became the best selling handset as I said earlier in Korea in September and RAZR black turned up the heat for demand around the world. With more than 12 million units to date sin consumer hands RAZR is the must have that you simply must have. Keep in mind when people refer to RAZR this is a family of products, even if you see RAZR for many years to come and as we just showed you GSM black and the CDMA version and next we will do more colors, Maria Sharapova in Wimbledon, to a lot of famous people in Hollywood, the pink RAZR is creating a sensation and you will see it in retail in time for the holidays.

We also launched Rocker V1, we are excited its just a beginning. We have got more to do in positioning in North America. We got off to a mixed year results. We did ship over 250,000 units in just 30 days. Actually we are pleased with the response outside the United States in Europe and Asia. It’s a great phone that delivers camera, blue tooth, messaging, web access and music with awesome play back time. It is not an iPod player but it’s a great phone first product from Motorola that delivers an awesome audio experience with a familiar and easy to use iTune interface. Little more about music. I believe really it’s a killer map of 2006. 10% of all music revenues today are ringtones. 3G networks and removal flash memory will enable over the year loading of music as well as providing for 100s if not 1000s of songs in a single device within the next couple of quarters. You don’t need a PC to load music. Example in Japan 20% of Japans total music market is ringtones and full songs that load over the year to mobile devices. Revenue in Japan is almost half a billon, CDDI’s 1204 has loaded 17 million songs and it takes 30 to 40 seconds with PG networks, same is true in Europe and starting in Brazil. So stay tuned it’s certainly happening.

In terms of other products the people ask me the 6.5 million raises, what about the other 32 million well here is some of them. We have new GSM products across the board 30 new handsets, _____. Next is here is what they are in CDMA with a 328 x 12 to 64 and so forth. Our iDEN business is strong as I said earlier we’ve launched five new iDEN handsets, which just keeps us going and we are hopeful we will be working with on our next generation products and as 3G’s we announced Motorola had won the first tender of the GSMA program to connect the unconnected. During Q3 we were again honored by the GSMA by winning the second tender, in which we announced two new models of C113 and C113A.

GSA program is very important both for the industries, consumers and in the developing world, by providing a portable access to wireless communication doors are opening to economic development and opportunity and we are really exited about that program.

Looking ahead to Q4 just keeps continuing, we are now shipping two customers PEBL V6, we think it is a hot product that really brings the passion together with the functionality I think you can see some of the capabilities here, with VGA camera, broadband connectivity and much more. We are also shipping to customers now, the ultra slim and cool Sliver L6 with tri-band connectivity and VGA camera and more. We are manufacturing right now with Sliver L7, it’s the worlds thinnest design, quadband, push-to-talk over cellular bluetooth VGA and we expect to ship this during the quarter.

We are now manufacturing our GSM entry level devices to complete the line up in GSM. We are now manufacturing RAZR, EDDO this is the ultra fast CDMA, EDDO RAZR with megapixel camera feature packed. We expect to ship this this quarter we will announce more details a little bit later. We are also manufacturing other CDMA products here is the V325, which I think is going to be a real great product in the mid tier. Now manufacturing our 3G RAZR it’s ready to rollout in the US MTS market to megapixel camera streaming video and we expect this to be a hotline for a carrier customers. And there are more 3G devices as you can see here across the lineup from the 1070 and 770 that gives us broad strength in 3G capability. And finally I’ve been talking the seamless mobility before, we are rolling out first seamless mobility with _____ in partnership with British telecom, our first GSM over IP model delivers push-to-talk over cellular functionality and seamless transition from GSM to wifi networks and back again. We are really excited about this and this will out this quarter. The commitment for the team is same as it was last quarter, grow market share profitable and wickedly compelling, as Ron likes to call products, rich experienced quality, efficiency and the guidance as you see here in sales operating earnings and operating margins up versus the same period last year and up sequentially in Q3.

Network business was also just a great quarter with AG and his team, sales of $1.6 billion operating margin of 17.1% sales up 7% with cup comparison year ago in sales increased 25%, sales performance came from Europe, Middle East, Africa. Operating earnings increased due to product cost reduction continued cost control and a real favorable sales mix. While we are very pleased with the quarters operating margin and I would love AG to do this every quarter, we continue to guide you to 12% to 15% in this business as a long term operating margin. Q3 GAAP earnings included a $5 million reorganization expense and without this the operating margin would have been 17.4%. After great things happening here we introduced our Moto wi4 product portfolio with utilizing compasses and IP core access network services and devices to drive delivery of comprehensive _____ solutions, I think there this is a big feature, we are seeing a lot of activity in the press on this. Our CDMA 2001 1xCDDO worlds broadband solution was selected by United States as they continue to rollout of Access’s broadband services. We signed a multi million-dollar contract with Philippines Smart Communications for our canopy products. I think this is really exciting, canopy continues to expand distribution worldwide and has added over 50 distributors this year we now have over 5,000 customers worldwide. We delivered more in the IMS based push-to-talk solutions to 44 wireless carriers in 33 countries. We now have over 1.2 million subscribers, that continues to grow. And we continue to progress in developing leading position in Wireline infrastructure solutions. Motorola is progressing and we progress on the schedule with a rollout of our optical access solution with Verizone under our five-year contract announced in April, we’ve progressed Verizone’s lab evaluations to initial field deployments. We expect general appointment status in fourth quarter ‘05 and scaled appointments should begin in 2006. And as we announced last quarter we have won a major IPTD contract with SPC along with Verizone over dispositions Motorola to be the market leader for IPTD solutions to airline carriers.

Our guidance in Q4 as I said earlier, is for sales to be up and operating margins down versus Q4 of last year, we expect operating earnings to be in the 12% to15% range as the sales mix we charge to what we believe would be the norm going forward. Again this is not a caution, this is a great business, we have targeted and in our modeling we want you to be confident with the 12% to 15% range of where this is going.

Government Enterprise Mobility Solution, sales in the quarter was 1.6 billion up 4% from last year. The government and enterprise portion of that business experienced 7% sales growth in Q3 while automotive sales were down 7%. Q3-GAAP earnings included a $52.0 million reorganization expense, without that operating margin was 14.3 up 70 basis points. Operating earnings reflected continued strong performance in our government enterprises business and a second sort of modest profitability in our automotive business, which as you will remember lost money in Q1.

What’s happening interspace with homeland security, I don’t have to tell you with what’s happening around the world recently, the need for all kinds of product and services Gregory Brown and his team provide has just gotten more exciting but more in demand. One example of this in this quarter was the O2 railway in United Kingdom. O2 railway is our largest single public safety customer, our system performance in part led to two new contract awards value collectively at approximately $100 million. We continue to win state local governments in the United States. During the quarter we won several multimillion-dollar awards for our interoperable systems. We now have won contracts in 29 of the 33 statewide interoperable digital systems in the United States. In addition we talk a lot about MASH as this continues to gain lots of traction, we began to ship the new 4.9 gigahertz motomash multi radial broadband product and we also unveiled Mistrack which delivers a wireless broadband indoor outdoor location system for first responders. We expect a high demand for this mission critical product in the prior market when it becomes commercial available in 2006.

Automotive, at lower sales in earnings versus last year but it was modesty profitable, Greg is doing a great job in turning this around and we do have an issue as you know worldwide in the automotive industry and we are feeling that we are now back to profitability. We are continuing with our strong emphasis on operational and cost improvements, infact new lifetime sales awards in automotive for Q3 exceeded a billion and were awarded in all regions and all product lines. One major award is from GM for the next generation telematrix control unit, Motorola’s telematrix control unit currently more than 50 GM vehicle models and was the sister behind GMs on star offerings, and GM has stated it’s plans to make the onstar RV available in all GM models by 2007. For this entire government enterprise mobility segment, our guidance for Q4 sales and operating earnings to be up versus Q4 last year driven by growth in the government and enterprise business offsetting a decline in automotive.

And finally and certainly not the least Dan and his team down in Horshum just had a bang up quarter, sales were up 28% due to significantly increased demand for advanced HD DVR settop. Operating earnings were up 48% from Q3 last year driven primarily by higher sales and operating margin is up sequentially as we continue to come down the cost curve on the 64 12 dual tuner DDR settop box. Excluding the organization expenses operating margin was up a 100 basis point versus Q3.

In the quarter we achieved a significant milestones by shipping over 40 million set top units since inception to-date. We began shipping the 3412 HDDVR set top, the newest all digital HD dual tuner DVR supporting open cable standards. Verizone launched it’s TV video service in _____ Texas deploying an end-to-end video network designed built and installed by Motorola which includes state of the art video set top products. We also named the supply of the next generation IPTV set tops for SPCs TV deployment. We also went to the Italian digital TV market for launch of new interactive threshold receiver providing access to interactive services. Our guidance for Q4 is for sales to be flat and operatings to be up versus last year, sequentially from Q3 we expect sales to be somewhat down and only to be up as our North American cable service providers, our customers definitely manage their year-end capital expenditures. We expect this to grow once again in Q1, we expect our V to be up due to the improved mix. Finally I show a slide now for the better of this year. I grade ourselves, I grade the team, I did have to after this great quarter add another check mark for execution, I think they just really did a great job, very proud of the team, the financial performance with stock doesn’t get any better and finally I think the organizational efficiency that we announced a year ago in terms of some of the things we are doing around simplifying the company, unifying some of our corporate functions supply chain work we are doing is starting to come into effect, and we are seeing that returned to the bottom line, so lot more to do as you can see from the slide. We had a great September 30th, October 1st in terms of raking up the numbers but the team is back hard at work in getting Q4 we are all looking forward to 2006. With that I will turn it back over to Edward.

Edward Zander : Thanks. Now before we take your questions I would like to remind you that in addition to Edward and David we also have Greg Brown, Dan Maloney and Eric here to answer questions. We would like to ask that each of you please limit yourself to one question and to avoid multiple part questions. We only do this to help ensure that in the limited time available as many of you as possible will have an opportunity to ask your questions. Your cooperation is greatly appreciated. Now I would like to ask the moderator of the call to please give you calling instructions.



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