Motorola Inc (MOT) Q4 2007 Earnings Call January 23, 2008 8:00 AM ET
Dean Lindroth - Corporate Vice President of Investor Relations
Greg Brown - Chief Executive Officer
Tom Meredith - Acting Chief Financial Officer
Matthew Hoffman - Cowen
Mike Walkley - Piper Jaffray
Phil Cusick - Bear Stearns
Edward Snyder - Charter Equity Research
James Faucette - Pacific Crest Securities
Tim Long - Banc of America
Ehud Gelblum - JP Morgan
Robert Peckover - Thomas Weisel Partners.
Scott Coleman - Morgan Stanley
Maynard Um - UBS
Mark McKechnie - AmTech
Todd Koffman - Raymond James
Tal Liani - Merrill Lynch
Tavis McCourt - Morgan Keegan
Richard Windsor - Nomura
Mark Sue - RBC Capital Markets
Brian Modoff - Deutsche Bank
Welcome to Motorola's Fourth Quarter 2007 Earnings Conference Call. (Operator Instructions).
After this teleconference, this 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 - Corporate Vice President of Investor Relations
Thank you and good morning. Welcome to Motorola's fourth 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 risks 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 press release on pages 16 through 24 in item 1A of Motorola's 2006 Annual Report on Form 10-K and in Motorola's other SEC filings.
This presentation is being made on the 23rd of January, 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.
I will now turn the call to Greg Brown, Chief Financial (sic) [Executive] Officer.
Greg Brown - Chief Executive Officer
Thanks, Dean. Good morning. With me today is Tom Meredith, our Chief Financial Officer. Today, we will discuss our results for the fourth quarter and full year 2007, as well as provide some perspectives on Q1.
But first, I do want to say that I am privileged to be the CEO. This is a company that has a long tradition of technology innovation, a great brand and talented associates that are committed to delivering quality products and services to our customers around the world.
Sales in the quarter were $9.65 billion. Earnings per share from continuing operations and excluding highlighted items were $0.14 and in line with the guidance we provided on our last earnings call.
I would like to highlight a few things that went well in the quarter, but also areas where we need to improve. Some highlights include solid sales performance in sequentially higher operating margins in our Home and Networks Mobility and Enterprise Mobility Solutions businesses. In addition, we reduced the operating loss in Mobile Devices, and operating cash flow was positive with a 10-day improvement in cash conversion cycle.
Despite these results and solid progress in a number of fronts, there are still some challenges, primarily in Mobile Devices, and these include demand for some of our products has float in intensified competitive landscape. Our consistency in new product introduction is still not where it needs to be, and we still have gaps in the portfolio in areas that are experiencing high rates of growth, including 3G, China and other emerging markets.
As a result, my main focus right now is ensuring we execute on the following priorities. Aggressively rationalizing the company's cost structure with a particular emphasis on Mobile Devices and our corporate G&A, and enhancing the Mobile Devices product portfolio and delivering a consistent and timely stream of innovative products.
With regards to the product portfolio, we are intent on transitioning to software and silicon that enables lower cost, faster time-to-market and richer consumer experiences, developing a broader 3G product line and expanding 2G, including low-tier devices around our new silicon architecture through ODM solutions, and introducing more products like the E8 music device that demonstrate unique experiences, innovation and design.
We recognize there is a lot more work to be done. That said, we've made meaningful progress, and I'd like to highlight a few examples. We reached an agreement with QUALCOMM to extent our relationship to include UMTS chipsets. We reached an agreement with Freescale that provides us with greater flexibility, and we are taking incremental cost action that will result in savings of $500 million.
Our portfolio enhancement efforts in Mobile Devices are obviously still in progress and will take more time to complete. During this transition, we will maintain a significant focus on cost, cash and driving profitability improvement. While Mobile Devices is a major focus right now, we will also ensure that Home and Networks Mobility and Enterprise Mobility Solutions continue to get the focus, attention and resources that they need to continue their strong performances.
2008 will be a challenging year, and the recovery in Mobile Devices will take longer than previously expected. We are taking on these challenges with both a sense of determination and urgency. I want to thank our associates around the world for their hard work and dedication this past year. I know it has been difficult for many. I also want to take the opportunity to thank our customers and our suppliers for their continued support.
And now I'll pass the call over to Tom, after which I will come back and discuss our business operations in more detail and provide some additional color on the first quarter.
Tom Meredith - Acting Chief Financial Officer
In the quarter, sales were $9.65 billion, down 18% versus last year and up 9% as compared to the third quarter. For the full year, sales were $36.6 billion, down 15% compared to last year. The year-on-year sales declines are all attributable to the Mobile Devices business.
On a GAAP basis in the quarter, the company had earnings from continuing operations of $0.05 per share compared to earnings from continuing operations of $0.21 per share last year. For the full year, we incurred a loss from continuing operations of $0.05 per share.
The fourth quarter GAAP results include highlighted items of $0.09 per share. This includes a $276 million charge related to an agreement that we reached with Freescale. We also took charges of $93 million related to our previously announced workforce reduction and $31 million for write-down of certain assets. These were offset in part by a tax related gain of $51 million.
Earnings per share from continuing operations and excluding highlighted items were $0.14 per share for the quarter and $0.24 for the full year. My next several comments will also exclude highlighted items.
Compared to the third quarter, gross margin percentage for the company was essentially flat, and operating expenses as a percent of sales improved. This, along with our higher sales, resulted in an operating profit of $381 million, up from $169 million reported last quarter. The other income was $52 million, up from $18 million last quarter.
The increase was primarily due to a pre-tax gain on the sale of embedded communications computing. On an after-tax basis, however, the impact of the transaction was insignificant. Our overall income tax rate in the quarter was 26%, and we continue to expect a more typical tax rate of 35% in 2008.
Our operating cash flow was $470 million in the quarter and positive in all three business segments. For the full year, our operating cash flow was $785 million. Fourth quarter results reflect significant improvement in our cash conversion cycle in the quarter with net cash of $4.3 billion, up slightly from last quarter.
In the quarter, we used $557 million, up from $118 million last quarter to repurchase 33.7 million shares at an average cost of $16.49 per share. To date, $7.7 billion of our total $11.5 billion in stock share repurchase authorizations have been completed. We have now repurchased approximately 385 million shares since we initiated our first repurchase program in 2005.
The cash conversion cycle at quarter end was 33 days compared 43 days in the third quarter. The improvement, I am pleased to say, was broad based. Receivables improved by three days. Inventory improved by six days, and accounts payable improved by one day.
The 10-day reduction reflected improvement across all businesses. Mobile Devices ended the quarter 11 days better than last quarter. Home and Networks Mobility improved by 14 days and Enterprise Mobility Solutions improved by 7 days.
We are pleased with the continued progress being made as a result of our focus and the alignment of our objectives and in priorities. The current momentum and discipline will serve us well in our efforts to continue to drive our cash conversion cycle of 20 to 30 days by the end of 2008.
Despite sequential improvement in our operating results, 12 months return on invested capital was lower. We are taking a number of actions which will enable ROIC improvement, one of which is our cost savings program. As Greg mentioned, we are taking incremental cost actions that will result in savings of $500 million.
Our previously announced workforce reductions are complete. At the end of December, we had approximately 65,000 employees compared to approximately 72,000 just after the Symbol and Good acquisitions were completed.
Moving onto our outlook, for the first quarter, we expect an operating loss from operations of $0.05 to $0.07, excluding items of the variety highlighted in our quarterly earnings releases. This guidance reflects our continued challenges in mobile devices. We will maintain tight controls over our operating expenses and continue to monitor closely the fluid market conditions.
Now, I'll pass the call back to Greg who will review business operations in more detail and provide additional color for the first quarter.
Greg Brown - Chief Executive Officer
Thanks, Tom. In Mobile Devices, sales for the fourth quarter were $4.8 billion on volume of 41 million units. Our estimated market share in the quarter was 12.4%. Excluding highlighted items, the operating loss in the quarter was $82 million compared to the $138 million loss last quarter.
North America and Latin America, our strongest markets, accounted for 53% and 20% of sales in the quarter, respectively. EMEA and Asia-Pac represented 15% and 12% of sales respectively and remain challenged due largely to our product portfolio, particularly in Europe and Asia. As we exited the quarter, channel inventory was essentially at normal overall levels.
Turning now to our product portfolio enhancement efforts, the top priority has remained our software and silicon initiatives, which will enable a broader portfolio of innovative and lower cost devices.
On the silicon front, we are pleased to have reached an agreement with Qualcomm to broaden our supply relationship. We intend to design Qualcomm chipsets into our UMTS handset portfolio. And as you know, TI will also be a key supplier of chipsets for UMTS devices in addition to their current significant supply role in our GSM products. And Freescale will continue to be an important supplier for both GSM and UMTS chipsets.
Our increased flexibility across multiple silicon providers will enable us to bring the market a broader range of devices at lower cost. The transition to having more devices with more cost competitive software platforms and chipset designs is underway. We will show additional progress by the end of the year, and have a more robust and competitive portfolio in 2009.
Moving on to the current product portfolio, in feature phone, RAZR and KRZR continue to be top sellers globally. In the quarter, we sold over 8 million RAZRs and over 3 million KRZRs. RAZR-2 has contributed another 1.5 million units. This month at the Consumer Electronic Show, we announced the newest additions to our ROKR franchise, including the touch-operated ROKR E8 music device, featuring several innovations, such as Morphing, Haptics and Crystal Talk and related accessories. The E8 was recognized at the show with multiple Best of CES Awards.
On the music front, we've been selling music and digital content to consumers in China, Hong Kong and Taiwan through our MOTOMUSIC service. Earlier this month we announced the acquisition of Soundbuzz, a leading provider of digital music in Asia. This acquisition provides a growth opportunity for Motorola and our carrier customers as it will enable us to enhance and extend MOTOMUSIC to India, Southeast Asia, Australia and New Zealand.
In multimedia, top sellers included the Z6 family of slider music devices. We also began shipping the Q700 Sidekick Slider, featuring fast access to instant messaging and email, and we announced the MOTO U9 music device. Recently at CES, we annoyed the MOTO Z10, a 3G device with the capability to capture, edit, and then upload content directly to websites such as YouTube and Facebook.
In the mass market, the W375 and W220 devices are among our top sellers. During the quarter, we announced several additional W series products that encompass everyday communications needs with SMS, Bluetooth, FM radio, cameras and other features at affordable price points. Our mass market devices accounted for higher percentage of units shift in the fourth quarter than in the third quarter, contributing to the sequential decline in the overall ASP.
In productivity, we added the latest addition to the Q family the Q9C CDMA device and we began shipping the HSDPA Q98 in North America. Looking ahead to the first quarter, we anticipate typical seasonal sequential trends for the overall handset market. In addition, given our current challenges, Mobile Devices units and sales will be down significantly compared to the fourth quarter resulting in an operating loss. I can assure you I am not satisfied with where we are, and we're moving quickly to address our top priorities.
Turning to Home and Networks Mobility and Enterprise Mobility Solutions, in short, they are executing well and have delivered solid financial results, and are poised for further growth in 2008. Home and Networks Mobility sales for the segment were $2.7 billion, up approximately 11% versus last year, and up approximately 14% versus the third quarter. Excluding the highlighted items, operating margin was 7.6% compared to 9.6% last year, and up from 6.9% in the third quarter.
Our Home business is focused on delivering personalized media experiences to consumers at home and on the go, and enabling service providers to operate their networks more efficiently, delivering new revenue generating applications and services to their subscribers.
Fourth quarter sales in this business increased sequentially to $1.1 billion and operating margin improved. For the full year, sales growth was 27% and operating margin increased, driven by growing demand for access to personalize content when, where and how consumers want it.
Regionally, sales in the fourth quarter in North America grew 12% compared to last year and accounted for approximately 80% of total sales. Sales outside North America were up 24% where we see very strong demand, particularly in Europe and Latin America.
In digital entertainment, we maintained our market leadership position with unit volume of 3.4 million digital entertainment devices, which included a record quarter for IP devices. HD-DVR and IP devices represented approximately 37% and 22% of total units respectively.
In video network solutions, we experienced solid growth in next-generation products, largely attributable to recently completed acquisitions. With important wins in the quarter at major operators like BT along with others, we are well positioned for continued sales growth in this area and in the quarters ahead.
On the product front, at CES, we introduced several products that support our media mobility focus. These included the DCX series of MPEG-4 HD set-tops, capable of advanced video services, media storage and usable as a home multimedia hub, the DH01 Mobile TV, a pocket-sized DVB-H device for multimedia entertainment on the go, and finally a plug-and-play WiMAX data port to support wireless broadband Internet connectivity to the home.
Turning to Cellular Networks, overall network sales in the quarter were $1.6 billion, up sequentially due to higher GSM sales. As we've talked about before, pricing pressures continue in GSM as does the declining level of IT infrastructure sales in the US, which continue to put pressure on operating margin. That said, we are profitable in each of the three main technologies, we are investing in future technologies, and we've maintained a consistent overall operating margin level.
Having said that, the industry is highly competitive, continues to be very challenging, and we do not expect this environment to change anytime soon.
In mobile broadband, we continue to expand our footprint. At the end of the year, we had 47 active trials, 15 commercial contracts and they deliver over 2,000 access points to our customers globally. In LTE, we are leveraging our WiMAX investment and recently were named by Verizon as one of the suppliers for their network trial.
Looking to the first quarter for the Home and Mobility Networks Mobility segment, we expect slightly lower sales year-over-year with lower operating margin. This reflects solid sales and operating margin performance for home. In networks, we expect lower year-on-year sales and operating margin due to continuing GSM margin pressure, lower infrastructure sales and the sale of our embedded communications computing group.
Now, let's take a look at Enterprise Mobility Solutions. Sales for Enterprise Mobility Solutions were nearly $2.1 billion, up 9% sequentially and up significantly as compared to last year due to the Symbol acquisition. Excluding the highlighted items, operating margin for the segment was 21.8% as compared to 17.2% in the third quarter.
As expected government and public safety sales of $1.5 billion for the quarter were flat year-over-year and up nearly 6% for the full year. Operating margin, excluding the highlighted items for the quarter and full year, were sequentially flat compared to a year ago.
In North America, in the quarter, North America accounted for 63% sales due in part to continued strong demand for our digital system solutions and growth resulting from the 800 megahertz rebinding. In EMEA, which represented 24% of sales, results were driven by TETRA Digital Radio Solutions and MOTOTRBO radios. Asia Pac and Latin America accounted for 8% and 5% of sales respectively.
We also closed on our joint venture with Vertex Standard, a global provider of two-way radio communication solutions. The joint venture will be a Vertex Standard access to Motorola's global distribution channels and will enable both companies to deliver a broader combined product portfolio to customers worldwide.
In Enterprise Mobility, our solutions allow our customers to reduce cost, increase worker mobility and productivity and enhance customer experiences. Total sales increased to over $640 million, up 11% compared to the third quarter. Sales from Symbol on a standalone basis grew again in the double digit range year-over-year. Overall, Enterprise Mobility operating margin improved sequentially.
The Americas accounted for approximately 60% of sales in the quarter, while EMEA and Asia-Pac represented approximately 30% and 10% respectively. In North America, Symbol sales higher year-on-year, as we continue to see strength in retail, transportation, logistics and other verticals. Europe had strong double digit year over year operating performance as well, driven by retail and field mobility and healthcare. Asia-Pac also saw double digit year-on-year growth.
The integration of Symbol, which has gone exceptionally well, is effectively complete and Motorola's brand recognition is beginning to broaden the market opportunities for Symbol's enterprise product offerings. Going forward, we will only be providing results for the total enterprise business and no longer calling out results for Symbol on a standalone basis.
On the product side, we announced integrated GPS functionality for the MC70 and an RF management suite, which provides an enterprise mobility dashboard for WiFi planning, network monitoring and security and device management. And recently, we launched a new category of device, the CA50, a voice-over-IP enabled wireless scanner for retail and healthcare.
Looking ahead to the first quarter, we anticipate typical sequential sales trends in both government and public safety in enterprise markets. For Enterprise Mobility Solutions, we expect slightly higher year-on-year sales and double-digit operating margin.
In closing, as we look at our fourth quarter operating performance, we met several of our financial targets, including earnings and cash conversion cycle improvement. But in Mobile Devices, as we know, we must drive improved profitability and enhance our product portfolio.
The first quarter will be a challenging quarter. We have taken some important steps with many more underway. The team is committed to getting the job done. And I look forward to updating you on our progress.
Now, I will turn it back to Dean to start to the Q&A
Dean Lindroth - Corporate Vice President of Investor Relations
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.
Our first question is from Matthew Hoffman of Cowen.
Thanks and good morning. First question here is on the guidance. The company clearly termed its losses in the handset from 4Q, but I was hoping to get some additional color on 1Q in terms of outlining what you meant by significant. Specifically, are you sill trying to hold the line on ASPs or is the company planning to do more to hold market share at the expense of margins here in 1Q? Thanks.
We are not actually guiding any color on ASPs, but what we are saying is in addition to the typical seasonal sequential trends, Q1 over Q4, we will experience further decline in mobile devices in both revenue and units. And from a market share perspective, we do expect to lose market share in Q1.
And how do you typically define seasonal 4Q to 1Q trial?
I think typically its 10% to 15% approximately, but our decline will be greater than that.
Thank you next question please.
Thank you. Your next question is from Mike Walkley of Piper Jaffray.
Great, thank you. Just building on that question, is it more because of the end markets, Latin America and the US are more seasonally down in terms of your outlook since you have such strong share there, or with significant drop-off in sales, are you seeing some inventory builds here in the beginning of January?
I think its combination of demand for some of our products has slowed, including some of our newer products. The competitive landscape has intensified. So we're incorporating those things into the guidance we're giving on Q1.
Its also relate to the product gap in terms of our mix of products, in terms specifically of low-end 3G and multimedia.
Next question, please.
Thank you. Your next question is from Phil Cusick of Bear Stearns.
Hi, guys. Thanks for taking my call. I recognize that there is a lot of incremental competition and that the product portfolio has holes. Can you help us out here, I think everybody on the call would like to hear about your view on the overall macro environment for handsets right now and what you are seeing on end market demand? Thanks.
Well, in terms of the overall market, I mean, we have to watch it very closely. There is no question about it. I think that the challenges in Motorola and I can only speak to that are driven largely by our product portfolio, as well as we need to be more consistent in new product introductions as we launch product and that remains our focus.
Having said that, to your point, we'll be very vigilant in watching the external environment in the markets by which we compete and react accordingly.
That sounds like you're not seeing a significant shift in demand at this point; it's more Motorola specific.
It is more Motorola specific, and I guess the color I provided macro level, looking down and to selective market into which -- so China, we expect to be continue to be a strong market environment. India, Asia more generally, and certainly I would say Latin America looks like it will continue to be strong, Western Europe and I would say United States probably not quite as robust. And more specifically, the seasonal trends there are more pronounced.
And Tom, if I could follow-up. Going back to early December, you talked a little bit more bullishly about the handset business overall. Was there really a major drop-off in December or was this weakening through the quarter?
I would say Thanksgiving to the Christmas selling season was where we experienced slower demand than we otherwise anticipated.
Okay. Thanks, guys.
Thank you. Your next question is from Eric Snyder with Charter Equity Research.
Thanks. It's Edward Snyder. You've now announced three silicon providers that QUALCOMM announced this morning. I am trying to understand how that measures with your philosophy about platforms. I know that there's been a lot of chat in the past about rationalizing your mobile platform design strategy that kind of emulate more like with Nokia and some of your bigger competitors are doing in terms of lowering costs, taking products that you have both software and hardware, and leveraging it across a large number of models.
But now you've got three suppliers of UMTS product. Can we expect a huge number of new UMTS models that you're going to win over the number of suppliers down to something more reasonable, or can we expect more of a wider variety of UMTS in a smaller unit volume? I am not sure how your costs are actually going to drop on your handset platforms of using so many different hardware, and then you layout that with the different software model. Can you help me go through that please?
Sure. First of all, we're pleased with the announcement with QUALCOMM today. What that affords us specifically is more flexibility and optionality as it relates to specifically 3G low to mid-tier. I think that will enable us to have lower cost devices and a broader based portfolio of devices, and expect to have them designed or us design those chipsets into our portfolio by the end of 2008.
Having said that, Freescale will continue to be and remain an important 2G and 3G chipset supplier. And as you know, we're also implementing with TI, 3G mid to high-tier, potentially more than that. So, actually I think the introduction of QUALCOMM clearly for us is a good thing and is consistent with the multi-source silicon strategy we've outlined, and both speaks to lower cost silicon, but also a broader based portfolio over time.
You will have three different suppliers then for just THE UMTS product. I mean last year you did under 10 million UMTS phones altogether. Do you see this is a solution to get more volume in UMTS or more variety, and do you think this is going to affect your cost structure relative to someone like Nokia, who uses predominant one maybe two suppliers' max?
The answer is yes. We do see three suppliers in UMTS for now. We think it's a good thing both strategically and financially over time.
Thank you. Next question, please.
Thank you. Your next question is from James Faucette with Pacific Crest Securities.
Thank you very much. I wanted to ask two separate questions, first on the macro environment. In Western Europe and North America, how you expect that to impact your Enterprise and Home and Networks business? Can you give a little color on that, particularly if as we're going to the first quarter?
And then secondly, just in terms of operating expenses on a running basis, can you give us an idea of where you are targeting as we go through 2007 R&D and sales and marketing expenses to be? Thank you.
Sure. So, in Western Europe, we are watching it very closely. By the way, from a mobile devices standpoint, let's start there, in Q4, we did have a slight market share decline sequentially quarter-over-quarter, as I think Tom referenced. That Western Europe marketplace is very important for us to be cognizant of both from Dan Maloney's business and Kathy's.
We are not seeing anything significant yet. However, to your point, it's quite fluid and we have to watch it closely. In terms of the cost rationalization and reductions, I think you will us put a particular emphasis on cost reductions in mobile devices and related mobile devices expenses as you would expect, as well as the corporate G&A.
It doesn't mean that will be the exclusive areas, but clearly, I think those will be the areas of focus and make most logical sense, given the fact that we have to lower it to break even at the corporation to reflect the current conditions that we are in.
Next question, please
Thank you. Your next question is from Tim Long with Banc of America.
Thank you. Back to the handsets, I guess their strategy on silicon and software of bringing other suppliers and to help reinvigorate the portfolio, could you talk a little bit about maybe the internal design teams as far as producing phones that are more appealing to customers?
And related to that, what is Motorola doing to restore their brand obviously with market share almost getting cut in half in five or six quarters? I imagine there is some brand repair that needs to happen. What are your thoughts there on recovering the global brand in some of the markets where the share losses have been large?
On the design teams' side, we actually have some of the best talent in the industry. And Motorola has been strong in design where we have to, to your point, transition that is to extend the iconic design into, and including software, the user interface and the apps and services that go with it.
We actually have some good strong design talent, and they're being incorporated in and more closely aligned with our software development efforts. Having said that, there is more work to be done and we'll look to add talent into software and product management to get better alignment on requirements and what's expected from end-user consumers.
In terms of the brand, the brand remains remarkably strong. I think it will be surgical with our marketing spend and look to augment the specific geographies and the new product launches to make sure Motorola stays relevant and top of mind. Obviously, I am speaking about Mobile Devices.
In the other businesses like Home and Networks Mobility and Enterprise Mobility Solutions, the batwings remain strong, and we'll make sure that we're doing the right kinds of things from marketing and spend standpoint in that part of the portfolio to maintain and extend the perception of our brand going forward there as well.
I would just add to Greg's point about the design teams. During the quarter, Greg, basically we had a central group of R&D type of engineers. Over 6,000 of them were consolidated at the corporate level and essentially doing work across the corporation.
We have now embedded those engineers into each of the various businesses to which they were assigned previously. And we think that coupling will now be a lot tighter going forward.
Next question please.
Thank you. Your next question is from Mike Ounjian with Credit Suisse. Mr. Ounjian, your line is live. Please proceed with your questions.
We'll move on to the next question from Ehud Gelblum with JP Morgan.
Hi. Thank you very much. First a clarification on the Freescale legal settlement, I'd imagine that that was something to allow you to include Qualcomm and possibly Texas Instruments as chip suppliers. But if you explain what the settlement with Freescale was about?
And then questions are given that you had a loss of scale now, but it seems to continue as you move into Q1 as several of your handset models, I assume, are getting a little long in the tooth and also given the fact that the growth in the industry is mainly in places like India and China where you would think, at least Nokia is showing, you sort of need a lot of scale to do well there otherwise you can't get the margins, how can you go after these growth areas without the scale? And so, how are you going to tact this sort of chicken and egg problem?
You need the scale to go after the growth. Without that, you can't get the growth to restore the market share. And so how do you kind of restore that balance?
And then finally, Greg, as you take a look now, being when you see -- first of all, congratulations -- how does the concept that perhaps splitting the company up whether it's moving these three pieces that you have currently in the three separate companies or maybe a piece of that cable or possibly even within mobile devices? Do you consider maybe breaking Mobile Devices up into a high-end and a low-end piece than maybe splitting? Do you consider the possibility of perhaps restructuring the company from that perspective at all?
So Ehud, let me take your questions in order. As it relates to Freescale, actually the terms of the settlement agreement are confidential. So I won't elaborate beyond that. In terms of scale and how to maintain relevancy given declining shares, I think it's a combination of two things. We have got to refresh the product portfolio as soon as we can. You've heard that before, and we're working it, and we'll continue to work it.
We like the fact that, as an example, the E8 product, the ROKR E8 was just recognized by a number of people at CES the Best of Show. But its one product, we need more than that. And we know to show a level of consistency around that. I think the scale on how to compete question in theatres like China and India also reflect a go-to-market distribution and presence.
And we actually have a reasonably strong go-to-market infrastructure in India, in retail, in-store and store, and we have a reasonable point of presence in go-to-market, and obviously incumbent operator relationships in China. We most recently put a gentleman by the name of Ruey Bin Kao over all of China who had some segment responsibility without Mobile Devices. He now has all of it. He has got relationships and we're augmenting the go-to-market support resources to maintain relevancy in this scale to compete on the distribution side in those theatres.
As it relates to the strategy of breaking up the company, our focus is absolutely improving the profitability in mobile devices and its reinforcing and extending the category leadership in the other businesses. As we do that, we believe also shareholders will benefit from enhancing and driving the economic value of Motorola.
I'd actually just like to make three comments and I want to be really clear as well. While the covenants in the nature of relationship between ourselves and Freescale will be maintained, you have to understand the execution of that agreement increased our flexibility, which is like Greg earlier talked here. I was excited to announce also today our relationship, expanding our relation with QUALCOMM and also TI.
Secondly, in terms of the "long in the tooth" comment, as we've already highlighted, we anticipate significant decline in both units and revenues in mobile devices in the quarter. You take that and I would highlight the products we recently announced, really won't ship until late in the quarter. So they will have less of a material impact in the quarter, which is why we expect to have operating loss in the quarter.
And thirdly in terms of scale, it's not going to start with products especially in India, China, in particular in emerging markets more generally, and we need to be not so much producer of volume to get scale. We got to produce the right design point with the right features and functionality at the right cost. And if we do that, scale will be lesser than obstacle than it is perhaps today.
Thank you. Next question, please?
Thank you. Your next question is from Hasan Imam with Thomas Weisel Partners.
Hi. This is [Robert Peckover] in for Hasan Imam. Thanks for taking my question. My question, basically, from your comments you said that the recovery would take place in 2009 in your Mobile Devices. When can we expect new units to be rolled out? Can we expect them to be rolled out this year in the second half of 2008?
So, two things. In terms of forward-looking guidance, the only guidance we're providing is Q1 based on our current challenges. That's what we're providing at this point in time, reference to $0.05 to $0.07 loss of EPS on an operating level. In terms of new products, we're not going to get out in front of our headlights. We will announce it as they come and keep you updated accordingly.
But we recognize, if you boil it all down, product portfolio refresh is the most important thing we can do in improving the performance in Mobile Devices, and that's what we're focused on.
And is that including low-end handsets in the portfolio?
I think you will see us look to expand in a couple of different tiers, including that one. Yes.
Okay. Thank you.
Next question, please?
Thank you. Your next question is from Scott Coleman of Morgan Stanley.
Hi. Thanks, guys. Good morning. Can you hear me okay? I'm getting some feedback.
We can hear you.
Great, thanks. Tom, can you just clarify on the Q1 earnings guidance, does the $0.05 to $0.07 loss equate to the $0.05 gain from continuing operations or the $0.14 ex one-time items that you reported for this quarter?
Okay. That's what I thought. I just wanted to clarify. And when you talk about declines in some of your existing products, the RAZR/KRZR numbers, the RAZR-2 numbers, all pretty good. I'm wondering if you could help us understand where you're seeing it. Is it primarily iDEN where Sprint is losing about a million iDEN customers a quarter at this point? And if so, how do you think about managing the decline in that business, which seems to be accelerating at this point?
So, a couple of things. As it relates to Sprint, we work very closely with them. Our two teams are engaged, and we will continue to do that. Both, on the infrastructure side as well as the handset side.
What's your other question on the --?
In terms of your iDEN handsets?
Yes, I think that I would just simply say it's incorporated into the guidance we are giving, and we are working pretty closely with them on the iDEN handsets side. I think we'll watch it closely to your point.
In terms of overall demand for our handsets, it's slowed as we referenced, and it's slowed even with some of our newer products. So, we have to be realistic to see that for what it is, react accordingly, adjust the cost structure and be frank about what we are going to do about it going forward. And that's what we are doing in the guidance we are giving.
Just one other thought, in Q1, we are not out looking any significant change in iDEN demand or sell-though in the quarter relative to Q4.
Thanks. Could you maybe just let us know what percent of the business is iDEN handsets today and where that was a year ago?
We don't break that out or give that level of granularity.
All right, guys. Thanks.
Thank you, Scott.
Next questions please.
Thank you. Your next question is from the Maynard Um with UBS.
Hi, thanks. I think you have some fixed costs related to some of your manufacturing plants, things like that. And with the lower unit volumes, there would obviously be a gross margin impact on the lower handset volumes. How much of an impact is that having on your Q1 outlook for Mobile Devices? And can you provide an update on your strategy there in terms of other divestures or JV, that sort of thing?
So, Maynard, to your point, it does have an impact on our gross margin and overall outlook for Q1. And as we talk about looking at cost reduction opportunities and just rationalizing our approach for Mobile Devices and related activities, I think that given the lower unit volumes, we are actively, Rita and Tom and others, looking how to optimize our manufacturing facilities and going forward look to improve on the configuration of the footprint.
And I guess if I could, just looking at your product portfolio and obviously some gaps in your product portfolio in the higher growth segments of the market, with Qualcomm products now expected probably until late this year or into next year, it sounds like you could potentially continue to lose share as we go through this year given that gap in the portfolio. Is that the right way to think about your share given your portfolio today or where I would be wrong in my thinking there? Thanks.
Yes, I take the logic of what you are describing. The only thing I would say is, in Q1, we do in fact expect market share. Beyond that, I wouldn't speculate, and we'll update you on a quarter-by-quarter basis.
Thank you. Next question please.
Thank you. Your next question is from Mark McKechnie with AmTech.
Great, thanks for taking that call. I wanted to congratulate you first on the Qualcomm decision and also the cash flow on the quarter. Focusing here on the US CDMA market, have you seen any impact from your design activities near-term or longer-term from the Broadcom injunction with Qualcomm? Thanks.
At this point, I don't think we have seen an impact. Obviously, the Qualcomm-Broadcom situation is something we'll monitor closely. In North America, specifically in the CDMA market, I think our teams continue to do a good job.
We have to make sure that we deliver on all the product teams and new products associated with that line-up. And Bruce Brda in particular and team in North America are chartered with doing just that.
Our market share in Q4 in North America was flat to slightly up. That said, we know that full well the competitive intensity really increased throughout '08, and we'll manage it accordingly.
I would say that we feel, based on our team's input, relatively confident that we are well positioned vis-à-vis the competitive landscape in terms of the Qualcomm-Broadcom dispute.
Great, thanks. And if I may, Tom, on the operating cash flow going forward into March and June, any commentary on that, do you expect to burn a little cash in March or can you keep the balance sheet under control here?
Well, we are not commenting on the second and third quarter's cash flow. But I think for those of you who know me before I joined Motorola, if there is anything, I am focused on its cash flow, and we're going to continue to be very vigilant and vigorous in how we attain the 20 to 30-day cash conversion cycle target by yearend. And obviously, that would have a more positive than deleterious effect on our operating cash flow for the year.
Great. Thanks, Tom.
Next question please.
Thank you. Your next question is from Todd Koffman with Raymond James.
My question was answered. Thank you
Thank you. Your next question is from Tal Liani with Merrill Lynch.
Hi, good morning. I have two questions. First one is just housekeeping. I saw that you took a charge for a write-down of assets this quarter, and you don't provide a disclosure, at least in the past, you didn't provide disclosure on the composition of you cash position. I am wondering if you can discuss your exposure to the credit risk and the way you invest your money. That's one thing.
Second, I'm trying to better understand the substantial decline in profitability between 4Q and the first quarter. It's a massive delta. And the question is whether it's all handsets or there is an impact on infrastructure also? And then when you look through 2008, do you reverse it only by a new portfolio, or is it also a question of timing of shutting down some of the expenses such as manufacturing, et cetera. So, how do you deal with this and how long does it take you to go back to historical profitability? And again, it's more of a qualitative answer than the quantitative one. Thanks.
In no particular order of importance, I'll just comment on a couple of those. And if I miss any, maybe Greg can chime in. In terms of the comments that both Greg and I made about significant unit and sales declines quarter-over-quarter, Q4 to Q1, in Mobile Devices, that pretty much how you explain about loss positions, especially when you combine that with the portfolio that we brought into the quarter. So obviously, the portfolio will have throughout the quarter until later in the quarter when the new products we recently introduced start to get traction.
That unit volume, obviously, has all kinds of ramification in terms of our absorption rate and also the mix of our products, therefore the sales decline. And that I think should help explain why there is a significant difference between Q4 and Q1 operating results in Mobile Devices especially for the company because that's where the loss is being generated.
Relative to networks, I think Greg has commented many times that our group there and Dan, in particular, Moloney is doing actually I think a fantastic job, managing that business and reallocating resources within that business. And yes, it's a challenge-based, but that business did not and is not substantially tracking from our performance in the quarter-over-quarter analysis.
The intangible asset, amortization or write-off of assets, we actually don't give specifics, but it does relate to a prior acquisition that we are now in the process of rationalizing and you'll probably hear more about that as the quarter unfolds.
So probably the Q1 guidance is primarily Mobile Devices, and as we've talked about with Home and Network Mobility, network infrastructure will also be down slightly, but the Q1 story is primarily Mobile Devices.
And I guess I missed one of your comments about the credit markets, debt markets. And obviously, we have a fair amount of cash and we invest that cash, growth cash. At quarter end it was about $8.4 billion. And you will see that spread throughout the balance sheet in terms of cash equivalents, short-term and long-term investments.
We obviously are, like everybody else, required to mark-to-market anything that essentially is in one of those buckets. And we did take a relatively minor charge on a mark-to-market basis related to one of our investments. We believe that is appropriately assessed and sized, and we don't believe we have any lingering based on everything we currently know -- exposure in that area.
Thank you. Next question, please?
Thank you. Your next question is from Tavis McCourt with Morgan Keegan.
Thanks for taking my call. First on the incremental $500 million of cost savings, can you talk a little bit about the timing of that being implemented? And then, secondly, on Mobile Devices I think you mentioned market share in Q4 being down in Western Europe, but flat to up slightly in North America. Can you comment on Latin America being the other big geography for you guys?
Yeah. So, from a market share perspective in Q4 for Mobile Devices, we were down in EMEA, we were down in Latin America, but still maintained a strong position. North America was actually slightly up, but effectively flat to slightly up. China was down. So, that's kind of composite key regions.
In terms of the $500 million and attacking the cost structure, we've already begun sizing it and identifying what needs to be done. As I mentioned, we'll particularly look at Mobile Devices and Mobile Devices related areas, as well as the corporate G&A and we will move swiftly in that regard.
I think somewhere in the talking points earlier, you heard the word urgent uttered by Greg. You should couple that with now.
Thank you. Next question?
Thank you. Your next question is from Richard Windsor with Nomura.
Thanks, very much. I was wondering your call on Enterprise Mobility over the last year or so, you've been managed fairly well buck the trend in North America where lot of your competitors are seeing some profit warnings. What has enabled you to be able to do that and what is the outlook for you being to continue to do that given the clouding economic environment?
I have to compliment Kathy Paladino and Gene Delaney in their respective segments who have done a phenomenal job, and the former Symbol Associates and we'll get away from using that, but I'll call him out in this regard. The Symbol acquisition and integration could not have gone better. We had hoped for that as we combine these two organizations, we would take the intellectual property, the product portfolio, the specific vertical applications to the mobile computing product line and put it with Motorola's batwings and added distribution, and it would be a "one plus one equals three" combination. And it's turned out to be successful at this point in time.
We have had very good talent and executive retention. Boris and the engineering team as well as Ray Martino, CTO, are just doing a great job. So I think it's the stickiness of the solutions that we deliver there, the width and breadth of the product portfolio and the fact that in mobile computing, they have expanded share.
On public safety, Mark Moon's team in North America, just specifically speaking to North America, the team has done excellent job. We have very significantly strong customer relationships. We have been investing in the R&D side to further differentiate our incumbency and product portfolio.
And it's due to the highlighted areas in the whole Motorola portfolio, I have to tell you. And we'll look to maintain that and stay focused on it to see if 2008 can be equally successful, but we are focused on that area and it's a fantastic segment.
And you can continue to gain share with the Symbol asset?
Again, we are not going to forecast specific share expansion in '08, but what I will tell you is that I think we are going to continue to grow that business in topline. And I think we will also have double-digit operating margin, and the team is doing a great job in investing and prioritizing the R&D spend and getting gross margin yield on every dollar of R&D spent.
All right, thank you very much.
Next question please.
Thank you. Your next question is from Mark Sue with RBC Capital Markets.
Yes, I know. Will the mobile devices reach breakeven this year?
We are not providing any guidance beyond Q1, and we will take it on a quarter-by-quarter basis, Mark. So, obviously, we have our hands full and we've forecasted a sharp revenue and unit decline and a market share loss in Q1, but that's the only thing we are giving at this point of time.
And in terms of headcount, it's 59,000, kind of the right number that we should think about?
We don't have a targeted headcount number per se candidly. We are focused more on the dollars and the associated things that drive the dollar costs. That $500 million is absolutely our focus area, and we are going to go aggressively to get it. We've already begun to get it. I wouldn't sink it up with the headcount number per se.
Okay. Thank you and good luck, gentlemen.
Operator, we will take our last question.
Your final question is from Brian Modoff with Deutsche Bank.
Yes, a couple of questions. One, and this isn't giving guidance, but would you kind of give us a range of what you think you need to do in volumes of handsets in millions of units to be at a breakeven point? That's assuming you've implemented these additional costs savings. And then would you venture to give us an idea what you think handsets unit volumes will grow this year for the industry overall. Thanks.
Well, as I know most would really love us to give a very detailed ASP unit and gross margin guidance. We are just not in a position on this call to set those expectations.
I didn't ask about ASP unit and gross. I asked about what level of production do you need to be at to be breakeven in handsets. Can you give us a range at least to what kind of -- that's just opposed of this most recent incremental cost cuts?
We're really not going to get down on that path. Sorry. If you want to ask a different question, go forward.
That's okay. Thanks.
I would like to turn the floor back over to Mr. Dean Lindroth, Corporate Vice President of Investor Relations, for any additional or closing remarks.
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 for the first quarter of 2008; expectations for expenses, workforce reductions and cost savings relating to 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 mobile devices ongoing silicon and software initiatives; 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; expected tax rate for 2008,; expected timing for the announcement, launch and shipment of new products; the sales impact and pricing of new products; the impact of volatility in the debt market on our invested cash.
This now concludes our call. Thank you.
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 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.
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