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.
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
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.
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
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
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.
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.
- 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
Now I would like to introduce Mike Zafirovski, President of the Personal Communications Sector.
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.
• 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
• 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
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
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.
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
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
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-
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
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
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.
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-
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
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
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.
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
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,
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
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
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.
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
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
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
Broadband Communications Up Up
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
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
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.