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Q1 2002 Conference Call Opening Comments

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  • 1. MOTOROLA CONFERENCE CALL OPENING COMMENTS FIRST QUARTER 2002 EARNINGS RELEASE The following text represents opening remarks made by: Ed Gams, Senior Vice President and Director of Investor Relations; Fred Shlapak, President of the Semiconductor Products Sector; Mike Zafirovski, President of the Personal Communications Sector; Ed Breen, President and Chief Operating Officer; and Chris Galvin, Chairman and Chief Executive Officer of Motorola, Inc. during Motorola’s first quarter 2002 earnings conference call, held on Wednesday, April 17, 2002. These opening remarks should be read in conjunction with Motorola's April 16, 2002 earnings press release and Motorola’s SEC filings. Good morning, With me this morning are Fred Shlapak, President of the Semiconductor Products Sector, Mike Zafirovski, President of the Personal Communications Sector, Ed Breen, President and Chief Operating, and Chris Galvin, Chairman and Chief Executive Officer of Motorola Inc. An Internet slide presentation is accompanying this conference call. The presentation can be viewed by visiting www.motorola.com/investor. This entire commentary will be available on the First Call Network and on our website later this morning, approximately two hours after the conclusion of this conference call. The taped call will also be available on our website at approximately noon, central time today. This conference call is occurring on the morning of April 17, 2002. The content of this conference call contains time-sensitive information that is accurate only as of the time of this live broadcast. If any portion of this conference call is retransmitted at a later date, Motorola will not be reviewing or updating the material that is contained herein. This conference call is the exclusive property of Motorola, Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Motorola, Inc. is strictly prohibited. CHRIS GALVIN’S REMARKS Thank you, Ed. The first thing I'd like to do on the call this morning is to congratulate and thank Carl Koenemann, our Chief Financial Officer who is retiring this week after 32 years of really superb service on behalf of the corporation. And we appreciate his value system, the way he has managed and built the finance organization, and the extraordinary many, many contributions which we couldn't name in this call. And we say thank you to Carl and wish him great luck in coaching a great baseball team, as he is now going to be able to do with his grandchildren. Each meeting I've reviewed Motorola's five-point plan to enhance shareholder value, to remind you, the plan is to continuously strengthen our management team, have very aggressive focus on our balance sheet, lower our break-even costs, keep our costs down, grow through innovative product,software applications and customer relations, building customer relationships, and constantly reevaluate our strategy and our business portfolio.
  • 2. Relative to our strengthening of our management team, as I indicated in the press release I have named new leaders in 70 percent of the 100 most leveraged management positions company- wide within the last 18 months at Motorola. At the beginning of the year, Ed Breen assumed his new role as Chief Operating Officer. He's in his first 90 days and he's off to a really, really great start. David Devonshire, our new Chief Financial Officer, joined us here just within the last 10 days or so. His focus, of course, will be on the overall finance organization; all aspects related to it. He'll be more involved in our strategy going forward. He'll be more involved in the analysis of the respective businesses in our portfolio. He will be more visible to the shareholders and to the analysts, and doing Wall Street interface with us. And I will be bringing him around to our shareholders and analysts, personally in the second quarter and third quarter to introduce him to you. As I indicated, we are continuously adding new talent. And as a reminder to you, I have named Motorola's new chief operating officer and Motorola's new chief financial officer, positions that report to me directly, Chairman and CEO, just within the last 100 days. And our second point relative to aggressive focus on the balance sheet, you've seen that we generated $150 million in positive operating cash flow this quarter. Ed will give you the details on depreciation, working capital and cap ex, et cetera, a little later in this call. Our net debt to net debt plus equity ratio is less than 19 percent. Relative to lowering our break-even level -- By reducing selling general and administrative expenses and manufacturing costs and other items, we announced actions last year to lower our break-even by 20 percent. We're continuing this quarter and next quarter to implement these, and we continue to search for more. Relative to growth, through innovative product software applications and customer relationships, Mike Zafirovski will tell you about the new line of handsets. We have a variety of new customers we announced for our new wireless chip set architectures, which Fred Shlapak will talk about. Whether it's in our automotive business and new design wins or the new iDEN technologies to double capacity for Nextel and a whole lot more, we continue to innovate and introduce and serve our customers uniquely and better in this period of time. And, lastly, relative to the constant reevaluation of strategy and business portfolio -- As you know, we have announced what we think is the new semiconductor industry business model designated “asset light” and we're making progress, as you can see. We just announced a new research and development relationship with STM and Phillips which Fred will talk about. We decided to integrate our software from our handset business with our wireless chip sets and cell phones. We talked about that and we're getting positive results. And, of course, we closed the Synchronous transaction in our BCS group, adding optical capacity to that network. And I think we think it's a very positive thing.
  • 3. And, lastly, I'll simply comment on China. There is a article in the quot;Wall Street Journalquot; today that leaves perhaps an impression that somehow Motorola might be suffering with respect to the changes taking place in China. And we would only like to make sure, from a transparency standpoint, that people understand we think China is a great strength in our portfolio. We see double-digit growth continuing in the handset business. We manufacture for that market locally. We have a spectacular relationship with the country of China. We have a real superb and talented staff there. We have the number three brand name in China, and we do urge that those who comment and write about China visit there physically. If you get in an airplane and go, whether one is an analyst or a reporter, because it's a pretty spectacular long-term opportunity, in our opinion. And with that, I'd like to turn it back to Ed Gams. ED GAMS' REMARKS I'll begin our comments with a review of our overall corporate results for the first quarter of 2002, my comments and those of my colleagues are based on ongoing operations, excluding special items. For greater detail regarding sold businesses and special items, I encourage you to review yesterday’s earnings press release. - First quarter sales decreased 20% versus a year ago. A net loss was incurred of $174 million compared with a net loss of $211 million last year. This was a loss of 8 cents per share, compared with a loss per share of 10 cents a year ago. Net margin on sales was negative 2.9% versus a negative 2.8% a year ago. - Gross margin for the first quarter improved to 29.6% of sales from 27.1% a year ago. Sequentially versus the fourth quarter gross margin improved by 1.3%. - SG&A expenses in the first quarter were 17.2% of sales versus 14.9% of sales a year ago. The increase in percent of sales is due to the decline in sales, as SG&A expenses were $85 million lower than a year ago. - R&D expenses were 14.8% of sales in the first quarter versus 15.5% a year ago. In dollars, R&D expenses decreased by $269 million. All segments had reduced R&D expenses versus a year ago, as low priority programs have been scaled back or ended as part of the effort to reduce the company’s break-even level. R&D expenses are still expected to total approximately $4.0 billion in 2002. - Fixed asset expenditures in the first quarter were $103 million versus $470 million a year ago. For the full year, fixed asset expenditures are expected to be approximately the same as the $1.3 billion in 2001. - Net interest expense rose to 1.9% of sales versus 0.8% a year ago as a result of less interest income from vendor financing of cellular infrastructure sales.
  • 4. - From a total corporate perspective, orders in the quarter were 11% lower than last year. Sequentially versus the fourth quarter orders increased approximately $700 million, or 12%. All segments, except the Commercial, Government & Industrial Solutions segment, had a sequential increase in orders. - The total corporate backlog position is down 6% versus a year ago. By segment, backlog is up in the Personal Communications and Integrated Electronic Systems segments, down in the Commercial, Government & Industrial Solutions, Global Telecom Solutions, and Semiconductor segments, and down significantly in the Broadband Communications, segment. Sequentially versus the fourth quarter total backlog increased approximately $700 million, or 9%, with all segments having a sequential backlog increase except the Broadband Communications segment, where backlog was slightly lower. - The market value of Motorola’s portfolio of publicly traded securities was valued at approximately $1.2 billion as of March 30, 2002. The largest of these investments are in Nextel, with a market value of $634 million, and Broadcom, with a market value of $193 million. No other individual investment represented more than 10% of the total market value of the portfolio. The liquidity and realizable values of these securities are subject to market and other conditions. Since the majority of these securities represent investments in technology companies, the fair market values of these securities are subject to substantial price volatility. Now I would like to introduce Mike Zafirovski, President of the Personal Communications Sector.
  • 5. MIKE ZAFIROVSKI’S REMARKS Good morning. I’m pleased to report that the Personal Communications Sector continued to make progress during the first quarter of 2002. … Following on our profitable second half in 2001, we are continuing to build momentum, excitement and preference for our products worldwide. … In Q4, PCS posted operating earnings of $208M, or 7% of sales. For Q1 of 2002, PCS operating earnings were $108M – 4.7% of sales – in a quarter that always contends with post-holiday seasonality. As a reference, last year at this time PCS posted an operating loss of $382M. Let me make three general comments before digging into the numbers. … 1) 2001 was a year in which we refocused and redirected the business. The current numbers reflect some of those improvements. 2) We recognize we have much more to accomplish. And, we certainly plan to use the improved business foundation to grow the business and to drive improved financials … quarter after quarter. 3) People who track this industry are aware of first-quarter seasonality. In addition, our Q1 results were affected by a significant reduction of our inventory in channel. Now, on to the numbers: • Sales for the quarter were $2.3B up 1% from Q1 last year, and up 3% if we exclude the paging business which we are exiting. Sales were up in Asia, Europe, and in North America compared to Q1 last year; however, in Latin America, sales were down very significantly. We attribute the decline in Latin America to a short-term void in our low- end TDMA product offerings, as well as to the economic conditions in Venezuela and Argentina. We have addressed the TDMA portfolio issue with the introduction of the 120t earlier this month. • Unit shipments for Q1 were 14.2M – up 13% vs. last year. We estimate our ship-in market share is about 17% based on an estimated Q1 industry shipments of approximately 85M units. • During Q1, we again had strong positive cash flow. We continue to work with operators to drive efficiencies into our business processes, resulting in an improved balance sheet. … One example of this is our inventory results. Inventory turns are at an all-time high for PCS, and our inventory balance is at the lowest level in 8 years. At the same time, our inventory in channel decreased by 2M units, improving the balance sheet of our operators and distributor partners as well. To ensure sustained improvements in inventory performance, we are implementing collaborative-forecasting and vendor- managed inventory processes with operators and distributor partners. These processes are creating real value for our customers by enabling faster time to market and by reducing their warehousing costs. Currently, these processes are being implemented to varying degrees with 15 customers.
  • 6. • Orders for the quarter were $2.5B, down 11% compared to Q1 last year, but up 15% from Q4. … Backlog at the end of Q1 continued to be strong at $2.7B – up 4% compared to Q1 last year and up 10% sequentially. Frankly, we don’t believe orders and backlog are as useful an indicator of future volume due to changes in operator purchase patterns, streamlined ordering and inventory processes, and more flexible supply chains. As we continue to drive supply-chain and customer process improvements we anticipate a work- down of our backlog position moving forward. • On a year-over-year basis, GSM unit shipments were up 35%, CDMA units were up 10%, iDEN units were up 4%, and TDMA units were down 57%. • Average selling prices were down 8% vs. Q1 last year, and down 5% from Q4. Trends for ASPs remain in line with our expectations for the year. … As products from our new portfolio begin to ship in the second half, we expect they will help offset normal price declines. • Operating earnings improved by $490M vs. Q1 last year, reflecting lower costs and higher market share. An improved product portfolio, benefits of our platform implementation, and cost reductions in both out manufacturing and support organizations contributed to these results. All of this translates into higher unit sales, higher gross margins and lower costs. … Before discussing our new products and the outlook for the second quarter of 2002, let me make several comments on the market and industry inventory levels: During our last call, I said that 2002 started with industry channel inventories approximately 2 weeks higher than normally expected. We believe the bulk of the excess industry inventory has been worked off as sell-through units exceeded ship-in volume by approximately 8M units in Q1. We estimate that Motorola stock in channel came down at a faster rate than the industry. This reduction certainly affected our sales in the first quarter, but it positions us well for sales gains in the future as our sell-through momentum continues. … Based on current conditions, we continue to expect that the total 2002 ship-in market will be about 420M units – an increase of approximately 12% over 2001 shipments. Let’s take a closer look at products and technologies … We’re excited about our product portfolio. … Recently introduced products are selling well. For example, during Q1 hot products included the V60 across all technologies and in every region, the 120 CDMA model, and the T191 in GSM. But, during Q1 we also unveiled a new 2002 portfolio, featuring 5 distinctive designs – including the world’s first UMTS handset – 3 refreshed handset models with enhanced technologies, and 8 accessories that expand and enhance consumers’ experience. Many of you have had a chance to experience our new portfolio at events such as CES, CeBIT, CTIA, and MotoRising in Milan and, most recently, New York City. I will not discuss the
  • 7. portfolio in detail here, but I will say design, style, and entertainment are the hallmarks of a renewed and refocused Motorola PCS. … I invite you to visit our website for a closer look at our products. From Milan to Manhattan and Hong Kong to Helsinki, the resulting media coverage has been positive and feedback from industry and financial analysts has been enthusiastic. … To help sustain the excitement and promote Motorola brand preference, we’re executing an aggressive, innovative strategy to build and position our brand in the global marketplace. In short, “Hello, MOTO” gives voice and attitude to our passion for making life a little bit simpler, a little bit smarter and a whole lot more fun with the power and promise of wireless. … Of course, for new technologies, we must do more to help fuel demand. … People want and need applications. … So, during Q1, we continued to work aggressively to expand the availability of applications capable of creating compelling consumer experiences – and in turn help fuel demand and customer ARPU. For example, we announced several external agreements to deliver future applications such as multimedia solutions for 3G handsets; J2ME-based games; and streaming, real-time financial applications to increase mobile productivity. Additionally, to help ensure a smooth introduction of Multimedia Messaging Service (MMS), we joined other industry leaders in the founding of the Interoperability Group for MMS. This will ensure industry cooperation on interoperability testing and problem solving. For 3G – a topic very much on the minds of those investing in this industry – we introduced the A820 as part of our 2002 portfolio introduction. Our rollout plans with Hutchison are on schedule, and earlier this week, we announced that we will be providing 3G handset requirements to Siemens and their customers during 2002 and 2003 and Fred Schlapak will be making additional comments. Looking ahead … We expect Q2 sales to be up sequentially and vs. last year, and higher operating earnings as a percentage of sales in the second quarter than in the first. Further, we continue to expect a profitable year and a full-year gain in market share. … I’ll wrap up by repeating our commitment. Regardless of economic outlook or trends, you can always expect three things from Motorola PCS: 1. Relentless pursuit of cost leadership and processes, 2. Close working relationships with operators that ensure effective commercialization of Motorola technologies and applications for the benefit of our customers and consumers, 3. And, an unyielding commitment to innovation. We are confident that this will deliver the value that investors expect and demand. Thank you for listening.
  • 8. FRED SHLAPAK’S REMARKS Thank you Mike and good morning everyone. I will provide you an update on industry dynamics, on recent developments in Motorola’s semiconductor business and on our progress in implementing our new business model to return to profitable growth as the market recovers. We are especially excited about the key announcements released over the past few days including Siemens’ use of our i.300 platform for their 3G handsets and our 300mm and process technology alliance with STMicroelectronics and Philips. I’ll cover these in more detail later, but first to the market data and our results. Semiconductor industry data, available through February, provide continuing signs that for the first quarter the semiconductor industry was in its second quarter of recovery. As expected, the recovery is beginning slowly. By end market the drivers fueling the beginnings of the semiconductor industry recovery include consumer products, automotive and wireless communication applications. Key trends driving the early stages of the recovery include customers' inventory restocking and broad macroeconomic stimulus already in place in the U.S. We continue to believe the recovery will accelerate throughout the year and is on track to produce semiconductor industry growth in the range of 5-10% for the full year 2002. As noted in yesterday's earnings announcement, our orders in the first quarter were up 18%, while sales were down 26% versus the same period a year ago. We are gratified to observe that our book-to-bill ratio for the quarter was 1.18, with corresponding ratios above 1.0 for all regions and market segments. Consistent with a market that is turning, bookings across all major business segments were higher than for the same period a year ago, while sales levels were below year-ago levels. Ongoing cost reduction actions contributed to a 20% decrease in the operating loss for the most recent quarter versus the previous quarter, even as sales declined 2.7%. Our balance sheet continues to improve, with cash flow on track to meet our goal of net positive cash flow for the full year. Backlog grew by a healthy 20% sequentially. We are on target to reduce 6,000 additional employees in 2002, as we announced in 2001. During the first quarter we reduced 1,700 employees. Our headcount at the end of the first quarter was 28,500. Our announced goal is to have under 24,000 employees by year-end. We are making very good progress in implementing our new business model. As I noted during our conference call last quarter, it consists of three major elements. First, an increased focus on proprietary, higher-value products. Second, a more efficient “asset light” approach in
  • 9. Technology & Manufacturing to reduce our fixed asset expenditures. And third, a much more aggressive approach to licensing intellectual property. On the product front our most significant quot;winsquot; during the first quarter were for our Innnovative Convergence wireless platforms in the merchant market. Benq Corporation of Taiwan, formerly Acer Communication and Multimedia, announced in January that it chose our i.250 platform to develop 2.5G/GPRS handsets for their global OEM customers. Benq is one of the world’s largest original design manufacturers, or ODMs. Revenue is expected to begin later this year. As announced in March, Eastern Communications Co. Ltd., or quot;Eastcomquot;, a large Chinese manufacturer and supplier of handsets, will use the i.250 platform for future GPRS-based handsets. We expect first revenue from this win in early 2003. Continuing this merchant market momentum, in February we introduced our i.300 platform for 3G handsets, which gives OEMs and ODMs best-in-class 3G technology. This platform includes an advanced chipset, image and video processing, an industry-leading development environment, and full support for rapidly building feature-rich multimedia phones and video-communicators. We were delighted to announce on Monday that Siemens IC Mobile, the world’s third-largest handset provider, will use the i.300 platform for developing its mainstream UMTS handsets. This is a long-term agreement and includes our DragonBall MX microprocessor series to provide applications processing and multimedia capabilities. These three wins, along with our wins at Motorola PCS, mean that we will be providing platform solutions to companies that represent more than 30% of the global cellular market. This is a great validation that our strategy of focusing on proprietary, higher-value platform solutions is sound and is gaining momentum! The second element of our new business model is the “asset light” strategy. The first step of this strategy is well under way with the consolidation of SPS-owned factories into a more cost-effective and efficient footprint. This is resulting in improved utilization rates and reduced costs as we move the loadings from older, less efficient factories into the remaining footprint. In January, production ended at MOS 8 in Austin and Bipolar 6 in Toulouse, France. Equipment move-out is proceeding on schedule. We had 18 fabs in 2000. Today we have 14 operating fabs and this number will be reduced to 8 by year-end 2002. As previously announced, we also are closing three more final manufacturing sites by the end of this year leaving us with 2 high-volume assembly and test facilities. We plan to augment our internal manufacturing capacity with greater use of foundries and contract final manufacturing. Consistent with this asset light strategy our fixed asset expenditures in 2002 are expected to total approximately $250 million, compared with $613 million in 2001. Our emphasis throughout this year will be on strategic investments, specifically in our leadership areas, such as deep sub-
  • 10. micron CMOS, silicon germanium carbon and SMARTMOS, along with selected key investments driven by customer demands. Throughout this consolidation process we are acting to ensure that SPS will have adequate internal capacity to complement our outsourced manufacturing. This will enable us to fully participate in the industry recovery and upside opportunities Beyond our aggressive efforts in asset rationalization we now are taking the second step in implementing the asset light strategy, providing access and a transition to 300mm wafer technology while cost-sharing for advanced research and development. Our announcement last Friday, of the signing of an MOU to create a comprehensive alliance with STMicroelectronics and Philips, will bring enormous benefits to Motorola. This will reduce our expense and capital associated with maintaining a leadership position in next-generation process technology. The combined resources of the three companies will be directed at the development of CMOS technology from the 90-nanometer node – down to 32 nanometers over the next 5 years. We also will develop complementary leading edge technologies, including silicon-on-insulator, advanced copper interconnect, MRAM, embedded DRAM, embedded SRAM and analog CMOS. We will be a full participant in the development of technologies that would enable 300mm processing and pilot line capacity in a shared R&D Center in Crolles, France. This alliance, between 3 of the top 10 semiconductor companies in the world, will accelerate future-generation technologies and provide leadership to the industry. At the same time it will substantially reduce the cost to each participant in terms of capital outlay and operating expenditures. From a Motorola perspective this will reduce by two-thirds the cost of maintaining our CMOS process technology roadmap and of gaining early access to 300mm pilot production. We expect to start to realize the benefit of this in late 2003. I will wind up by repeating our pledge-to drive a revitalized, profitable semiconductor solutions business through the introduction of new high-value products and careful asset management. We are well on our way toward achieving our goals of modest profitability by the fourth quarter of this year and of sustainable growth and profitability beyond 2002. Thank you for listening. Now I will turn it over to Ed Breen. ED BREEN’S REMARKS I will first review the Broadband Communications, Commercial Government and Industrial Solutions and Global Telecom Solutions segments and then make some overall corporate comments.
  • 11. Broadband Communications Segment The Broadband Communications Segment reported orders of $537 million and sales of $525 million during the quarter. This is a decrease of 41 % in orders and 36 % in sales in comparison to the first quarter of last year. For the quarter, operating earnings were 11.2% of sales, compared to 14.4% in the prior year. Despite overall lower year-on-year volumes in this market, the Broadband segment was still able to deliver solid operating profit performance, benefiting from overhead structure actions taken in 2001 and continued product cost reductions and supply- chain savings. During the quarter, we shipped approximately 1.4 million digital cable set-top terminals; total shipments now exceed 20 million. We also shipped approximately 600 thousand cable modems during the quarter. This brings the total number of cable modems shipped to approximately 8 million. Cable modem volumes were down sequentially for the first quarter in the United States as many of our broadband operator customers worked diligently to recover from Excite@Home’s service shutdown. Recent meetings with our customers do indicate a recovery in weekly data subscriber acquisitions back to normal levels. Retail continues to be a bright spot for our modem business. Micro Center, a leading national computer retailer, recently joined the list of retailers carrying Motorola Broadband products. Through February, industry market data indicates that Motorola has outsold all other modem suppliers combined in retail outlets. We are beginning to see increased interest from our broadband operators in advanced gateways and systems for the delivery of advanced services, such as video-on-demand and personal video recording services and high-definition television (HDTV). Motorola’s DCT5100, recently introduced, has attracted significant operator interest due in part to its integrated HDTV decoding capability. During the first quarter, Motorola announced an agreement to manufacture and market a new class of advanced gateways called the broadband media center (BMC). This new platform, engineered by Motorola and Digeo Inc. is designed to enable robust, interactive services that will seamlessly integrate with existing broadband infrastructure and equipment. The first model, the BMC8000, works in conjunction with Motorola’s industry-leading DCT2000 class set-tops. Charter Communications, one of the nations largest broadband cable operators, will be the first to deploy the new media centers later this fall. Motorola achieved a significant industry record shortly following the end of the quarter with its Broadband Services Router, the BSR 64000. Cox Communications announced that its Las Vegas regional cable system has surpassed industry norms by supporting nearly 15 thousand (15,000) cable modem customers on a single router. This is at least two times the capacity of existing systems in the market. Motorola’s Voice-over-IP trials and deployments remain successful in North America and Europe. Motorola and Nortel announced an alliance to create and deliver an integrated voice over IP solution for the broadband-cable market. This announcement follows successful deployments of an integrated IP based solution with Callahan’s ‘ish’ systems in Germany.
  • 12. Together, Motorola and Nortel will provide broadband network operators with a complete, integrated voice over IP solution that is pre-tested and in compliance with industry standards. As Chris indicated, we successfully completed the acquisition of Synchronous, Inc. By integrating Synchronous’ 1550 technology into our Omnistar optics platform, combined with Motorola’s industry leadership, established relationships and partnerships, we are now clearly positioned to meet the current and future needs of our broadband network operators. In support of our new transmission product portfolio, Time Warner Cable approved Motorola’s Omnistar optical broadband transmission platform. The Omnistar platform is the first platform to be approved under the new Time Warner requirements and will play a critical role in helping to minimize the additional head-end space and cost of equipment. And finally, Germany’s Hessen system announced that it intends to upgrade its existing one-way cable network using Motorola’s broadband cable technology. This two-way upgrade will enable one hundred thousand households in Frankfort to access advanced digital services. We expect modest sequential revenue and profit increases throughout 2002. While controlling overall expenses, we have continued to invest in R&D to have the most comprehensive voice, video and data offerings. With this product portfolio we expect to see benefits from the AT&T Broadband/ Comcast merger and key European MSO’s once restructuring activities are completed in that region. Commercial, Government and Industrial Solutions Segment The Commercial, Government and Industrial Solutions Segment reported sales of $799 million, a decrease of 10% from last year. Operating earnings increased to $53 million in the first quarter from $43 million last year as a result of continuing cost-containment actions. Sales were negatively impacted by slowdowns in government and enterprise market spending in the North America. CGISS successfully implemented South Africa’s first digital public safety radio system, a TETRA-compliant system in the City of Cape Town. It also won a contract to supply its COMPACT TETRA product to Mobicom, a trunking communications operator based in Hamburg Harbour, Germany. COMPACT TETRA is a new TETRA system designed specifically for small and medium-sized businesses. The segment also announced it will design, manufacture and market infrastructure, portable and mobile two-way radio products for use in the 220 MHz band for enterprises and private carriers in the U.S. CGISS continues to make solid progress in the area of integrated solutions. Our Printrak subsidiary was selected in Canada to provide a Regional Automated Fingerprint Identification Access System as well as a country-wide, security network for airports and border patrol sites based on its LiveScan product, which is an integrated booking solution with mug-shot, palm and fingerprint capabilities. Printrak also was certified as an official LiveScan vendor by the California Department of Justice. In addition, Printrak was selected by the city of Henderson, Nevada, to provide its “Digital Justice Solution™, which is the first integrated solution network of its kind in North America. The comprehensive solution includes computer-aided dispatch,
  • 13. records management, corrections management, automated fingerprint/palm print identification, LiveScan and mug-shot technologies. Looking ahead, the worldwide two-way radio market is expected to be relatively flat in 2002 versus 2001 although this market typically grows sequentially throughout the year. As government-funded programs become solidified regarding homeland security, which we expect to begin to occur in the fourth quarter of 2002, Motorola intends to be very well positioned to participate. CGISS continues to focus on growing its market share, improving profitability and asset management, while positioning itself for success in the emerging market for integrated solutions and clearly homeland security technologies. Global Telecom Solutions Segment The Global Telecom Solutions Segment reported a positive book to bill ratio in Q1 with orders of $1.3 billion. In addition orders were up sequentially from $1.1 billion in Q4 2001. Segment sales of $1.1 billion were down sequentially from $1.4 billion in Q4 2001. As we have previously stated, we expect that the worldwide wireless infrastructure industry will decline by about 10 percent in 2002. In this environment we remain focused on operational excellence and cost reductions. The Segment’s budgeted costs declined 19 percent from Q4 2001 to Q1 2002 and the segment is on track to significantly lower its break-even point, with budgeted cost reductions in 2002 likely to exceed 20 percent over the previous year. Engineering investments continue to be focused on our core competencies in GSM, CDMA and iDEN, as well as pursuing third generation (3G) growth technologies WCDMA and 1X. The Segment is focused on existing commitments, winning new business, increasing operator’s margins through services and migrating current customers toward 3G. This quarter KDDI successfully launches a Motorola supplied CDMA2000 1X network services as scheduled on April 1. KDDI has realized very strong sales of 1X voice and data subscriptions in the first two weeks of commercial availability. We also showcased Motorola’s strength in WCDMA technology by performing China’s first 3G high-speed audio and data calls through a real, complete and integrated end-to-end UMTS. In addition, Motorola successfully completed its first UMTS voice call in Germany that is Release 99 compliant. We previously announced a 144 kilobit per second data call over the same Motorola UMTS Radio Access Network. Motorola’s portfolio of UMTS system components includes mobile terminals, the Radio Access Network and application servers. Motorola executed a formal agreement with Nextel in connection with delivering the previously announced enhancements to iDEN wireless network technology, which are expected to double wireless voice capacity while maintaining voice quality.
  • 14. In GSM, GTSS received a contract from Telkomsel, Indonesia's leading mobile operator, worth an estimated $170 million for the supply of dual-band network infrastructure services and equipment. With this agreement, Motorola becomes the largest supplier of base stations to Telkomsel. Motorola announced a $253 million contract with TA Orange for the supply of radio access equipment and services for a GSM 1800 turnkey network in Thailand. Motorola expects to provide vendor financing for approximately 20 percent of the contract value. In conclusion, the Segment continues to focus on operational excellence – lowering the break even point while continuing to invest in the growth technologies and executing on existing customer commitments and winning new customers. I’ll now close with some overall Motorola comments: 1. What I was most pleased about in the first quarter was our orders. Our orders in the first quarter totaled approximately $6.7 billion, exceeding first quarter sales of $6.0 billion. 2. We are implementing our previously announced action plans to reduce the breakeven level of the company. The additional actions for which special charges were recorded in the first quarter are expected to further reduce costs and lower the company’s break-even point. We are on target towards reducing our employee population to the previously announced number of approximately 100,000 from a high of approximately 150,000 during the 3rd quarter of 2000. We finished 2001 with approximately 111, 000 employees and during the first quarter of this year we reduced our population by approximately 4,000 to approximately 107,000 employees. 3. We remain highly focused on maintaining a strong cash position and a strong balance sheet and we continued to make good progress during in the first quarter of 2002. We reduced working capital by over $500 million. Depreciation exceeded capital expenditures by $422 million. We reduced accrued liabilities related to the special charges taken last year by more than $125 million and yet, in total, we generated approximately $150 million of positive operating cash flow. Our net debt declined. Our net debt to net debt plus equity ratio remained below 19%. 4. We continue to be very pleased with the progress being made in our handset business to improve profitability and market share. 5. We are being particularly careful with expense levels in our Semiconductor and Global Telecom Solutions segments, in order to return those businesses to profitability as soon as we can. 6. Our guidance for sales in the second quarter of 2002 is sales of between $6.3 and $6.4 billion. We expect to reduce our operating loss to 4 cents per share, which is the current consensus estimate, excluding any impact of special items. 7. Barring any unforeseen economic or political disruptions, we continue to expect a decline in sales from ongoing operations for the full year of 2002 of between 5% and 10%. We continue to manage our costs based on sales at the lower end of this range of guidance. We continue to expect to return to profitability in the third quarter of 2002 and to be profitable for the full year, excluding any impact of special items. While the current consensus earnings expectation for the full year of 2002 is 0 cents per share, we continue to believe that earnings of 4 cents per share is achievable. Our expectation of a return to profitability on lower sales continues to be based on three primary factors: (a) cost reduction actions announced last year, with additional steps being taken this year, (b) improved gross margin in handsets, coupled with double digit sales growth in
  • 15. that business and (c) improved gross margin in semiconductors as that industry recovers, resulting from higher utilization of fewer, more efficient wafer fabs. Now here is Ed Gams to give you our second quarter guidance by segment. ED GAMS’ REMARKS Thank you, Ed. Now I'd like to review our segment guidance. The use of the word “significantly” in this guidance section indicates a change of greater than 25%. The use of the words ”very significantly” indicates a change of greater than 50%. These words are only used in our guidance of sales. VERSUS 2nd QTR. 2001 VERSUS 1st QTR. 2002 SALES OPR. EARNINGS SALES OPR. EARNINGS % OF SALES % OF SALES Personal Communications Flat Profit vs. Loss Up Up Global Telecom Solutions Down Loss vs. Profit Up Smaller Loss Commercial/Government/Industrial Down Flat Up Flat Down Down Broadband Communications Up Up Significantly Semiconductor Down Smaller Loss Up Smaller Loss Integrated Electronics Down Up Flat Flat Other Products Down Larger Loss Flat Flat Now before we take your questions, we would like to ask that each of you please limit yourself to one question and 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 appreciated. We have made forward-looking comments regarding the following: research and development expenses; fixed asset expenditures; worldwide industry shipments of wireless handsets in 2002; average selling prices of wireless handsets in 2002; new wireless handset products; sales, profitability, cash flow and
  • 16. market share in our various businesses; worldwide semiconductor industry growth in 2002; sales of new semiconductor products; semiconductor employee population; semiconductor manufacturing facility closures; new semiconductor business model objectives; semiconductor fixed asset expenditures; the impact of a newly announced semiconductor R&D relationship; new broadband products; two-way radio equipment industry growth in 2002; order trends; worldwide wireless infrastructure industry growth; cost reductions in the Global Telecom Solutions segment; new wireless infrastructure products;total company employee population; segment guidance for the second quarter of 2002; expected Motorola sales and earnings per share for the second quarter and full year of 2002. Actual results could differ materially from these comments. Information about the factors that could cause such differences can be found in yesterday's earnings release and on pages F-35 through F-40 of Motorola's 2002 proxy statement for its 2002 annual meeting, and in other SEC filings.

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