MOTOROLA CONFERENCE CALL OPENING COMMENTS
SECOND 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; David Devonshire, Chief
Financial Officer; Ed Breen, President and Chief Operating Officer; and Chris Galvin, Chairman
and Chief Executive Officer of Motorola, Inc. during Motorola’s second quarter 2002 earnings
conference call, held on Wednesday, July 17, 2002. These opening remarks should be read in
conjunction with Motorola's July 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, David Devonshire, Chief
Financial Officer, Ed Breen, President and Chief Operating Officer, 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 July 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
Ed, thank you very much. And I'd like to begin by reporting on our five-point plan to enhance
shareholder value that I introduced about a year and a half or more ago. It includes a continuous
enhancement of our leadership team, stabilizing and improving the balance sheet, significantly
reducing our costs of manufacturing capacity to improve profitability, to grow the company
through innovation and new products, and customer relationships and to continuously re-evaluate
the strategy in the portfolio of the company.
I looked at the leadership, as I've said before on these calls, and replaced 70% of the top 100
global leaders in the company over an 18-month period of time. About 80% of those changes
took place from great talent from within Motorola; about 20% came from the outside. We have
Ed Breen as our new Chief Operating Officer, at the beginning of this year. And David
Devonshire is our new CFO here in the first 100 days. And, as you understand, the pace
continues, I made two changes on the senior leadership team out of 15, here just in the last 45
Again, we have a good pace and set of changes as we work together as a team. Secondarily, I see
the ledger enhanced on the balance sheet we produced this quarter, an additional $520 million in
positive cash flow. Our net debt to net [INAUDIBLE] plus equity ratio has continued at about
the same level as before, even after restructuring and we have $6.5 billion in cash on hand.
In reducing costs and manufacturing capacity as I said in our press release, we didn't shy away
from the necessary kinds of changes that needed to be made. Given the telecom and dot-com
booms, we purposely restructured the company back to a mid-1990s level before that era in time.
We did take a large additional charge for asset impairment and other cost reduction actions this
quarter, targeting a 93,000 employee level.
You can see the beginning results we're getting a gross margin of 33.6%, compared to 26% a
year ago. Excluding special charges, profit -- positive profit profitability of 2 cents per share and
we accomplished this one quarter earlier than our plan. Relative to growing as the fourth point to
innovation, we have--despite all of the necessary restructuring we've had to do--we have
maintained a significant investment in research and development. It will be about $3.8 billion,
compared to $4.3 billion at its peak,spending the rate is 14%, up probably 8 or 9% is our
traditional level. So we're spending for our future.
We have spectacular new handsets coming. We have a huge number this quarter of design wins
in our semiconductor business and automotive telematics business. We've got terrific customer
wins in broadband in our two-way radio and cellular infrastructure activity all over the world.
And lastly, relative to evaluating the strategy and portfolio of the company, when we're doing
this restructuring we also--we're always looking forward in identifying the looking forward
business models for this next coming era of the next four to five years. We'll be discussing these
in more detail in our analyst meeting in late July, but we're actually quite excited about the new
framework within at which our sectors operate. We made great progress in [INAUDIBLE] model
in implementing the semiconductor.
We have in some specific arenas terminated some investments we are making in research and
development because they weren't meeting our business models or our milestone step kind of
investing that we're doing these days. We've returned to research and development. Motorola's
company at this stage as you look at it is selling real products, and it fulfills real essential needs
of global, modern society.
We've got a broad base of those products to put more diversity in our portfolio, which is serving
us well at this juncture, and again, the company is totally focused on generating profit and cash
in and around the business models and with that, I'd like to introduce our new Chief Financial
Officer, who's joined the company here in the last 100 days or so, Dave Devonshire.
DAVID DEVONSHIRE’S' REMARKS
I'll begin our comments with a review of our overall corporate results for the second 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.
On a comparative basis, second quarter sales decreased 8% versus a year ago. Net earnings were
$48 million compared with a net loss of $238 million last year. This resulted in a profit of 2
cents per share, compared with a loss per share of 11 cents per share a year ago. Net margin on
sales was a positive 0.7% versus a negative 3.3% a year ago.
Gross margin for the second quarter improved to 33.6% of sales from 26.0% a year ago. In
comparison to the first quarter, gross margin improved by 4.0%. The largest improvements in
gross margin versus the first quarter were achieved in the Semiconductor, Global Telecom
Solutions, Personal Communications and Broadband segments.
SG&A expenses in the second quarter were 16.7% of sales versus 14.9% of sales a year ago and
17.3 % in the first quarter. The increase in percent of sales is due to lower royalty income,
accounts receivable write-offs related to Adelphia Communications and Worldcom, and higher
advertising spending in the Personal Communications segment along with the 8% sales decline.
R&D expenses were 14.0% of sales in the second quarter versus 14.7% a year ago and 14.8% in
the first quarter. In dollars, R&D expenses decreased by $130 million, 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 now are expected to total approximately $3.8 billion for the full year 2002.
From a total corporate perspective, orders in the quarter were 18% lower than last year.
Sequentially versus the first quarter orders decreased approximately $325 million, or 5%. As
stated in yesterday’s earnings press release, a new, more efficient approach to processing orders
and backlog is being implemented in the Personal Communications segment. Mike Zafirovski
will be discussing this in detail in a few moments.
The total corporate backlog position is down 12% versus a year ago. By segment, backlog is up
in the Semiconductor and Integrated Electronic Systems segments, flat in the Commercial,
Government & Industrial Solutions segment, down in the Personal Communications segment –
and again Mike will comment on this shortly - and down significantly in the Global Telecom
Solutions and Broadband Communications segments. Sequentially versus the first quarter total
backlog decreased approximately $275 million, or 3%, with all segments having a sequential
backlog decrease except the Semiconductor and Commercial, Government & Industrial
The market value of Motorola’s portfolio of publicly traded securities was valued at
approximately $695 million as of June 28, 2002. The largest of these investments are in Nextel,
with a market value of $347 million, and Broadcom, with a market value of $94 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.
Our cash and debt position continued to improve. At the end of the second quarter, our net debt
(total debt less cash, cash equivalents, and short-term marketable securities) was down to $2.5
billion from $3.0 billion at the end of the first quarter, and $3.1 billion at the end of 2001.
Specifically, cash increased by about $500 million in the quarter, and total debt fell by about
The almost $600 million reduction in net debt was after we paid about $500 million in cash in
the second quarter and about $700 million in the first half in restructuring charges and to fully
fund an escrow account related to an Iridium lawsuit. In addition, $1.2 billion of the $2.5 billion
of net debt is part of an equity security unit that will provide an additional $1.2 billion of cash
proceeds from the issuance of common stock in 2004.
As a result of available excess capacity and management actions, such as the implementation of
the Semiconductor segment’s asset-light business model, including its future outsourcing plans,
capital expenditures have been and will continue to be greatly reduced from prior historical
levels. In the second quarter, capital expenditures were $136 million and depreciation was $514
million versus $103 million and $525 million of depreciation respectively in the first quarter.
For the full year 2002, we now estimate capital expenditures will total no more than $1 billion.
This compares to depreciation of about $2 billion. Although it is very early in our planning cycle
for 2003, we believe that capital expenditures in 2003 will be between the $1.0 billion estimated
for 2002 and the $1.3 billion actual for 2001.
Now I would like to introduce Mike Zafirovski, President of the Personal Communications
MIKE ZAFIROVSKI’S REMARKS
Good morning. I’m pleased to report our results.
For the quarter, we increased our market share and we posted operating earnings of $172M, or
7% of sales. This is the 4th consecutive quarter of positive operating earnings for our segment.
Let’s take a look at the numbers:
Sales for the quarter were $2.6 billion, up 5% from Q2 last year, and up 14% sequentially. Sales
were up by double digits in Europe and the Americas compared to last year. In Asia, sales were
flat compared with a strong second quarter last year. On a sequential basis, sales were down
slightly in Europe, up in Asia, up in North America, and up very significantly in Latin America.
Unit shipments for the 2nd quarter were 16.7M – which is up 1% vs. last year and up 17%
sequentially. We estimate that our market share is about 18% based on 2nd-quarter estimated
industry shipments of approximately 91M units. I should also point out that unit shipments in the
2nd quarter of last year included for us end-of-life inventory clearance.
Let’s talk about cash flow. … Q2 was our 6th consecutive quarter with strong positive cash
Inventory turns are in double digits and remain at an all-time high for PCS. In the 2nd quarter,
we also decreased channel inventory by another 1 to 2 weeks of sales, bringing our current
channel inventory below industry levels. This improves the balance sheet of our operators and
distributor partners – and positions us well for strong seasonal ship-in activity in the 3rd and 4th
Orders for the quarter were $2.5 billion, down 11% compared to Q2 last year, and flat
sequentially. Backlog at the end of Q2 was $2.7 billion, down 11% from last year, and down
slightly from Q1. PCS orders declined – and are expected to continue declining for the next 2 to
3 quarters – even as sales increased and are expected to continue increasing. I know it seems
counter-intuitive, but the decline in orders and increase in sales is precisely what we expect in
transitioning to our new business model. We are working proactively with customers to create
working capital reductions through collaborative planning and forecasting improvements. These
actions reduce both the customers’ and Motorola’s need for multiple months of advance orders
and accordingly will result in lower order backlogs. We estimate that our backlog will be
reduced by approximately $1billion over the next 2 to 3 quarters – which, of course, will have a
corresponding negative impact on reported orders – but this will not have any negative impact on
our short- or long-term sales results. This is a much more efficient and cost-effective way to run
a short-cycle business and meet market demands.
Let’s turn to shipments. … By technology, GSM unit shipments were up 3% sequentially but
down 7% vs. last year due to inventory clearance activity during 2001. CDMA units were up
23% year-over-year and up 51% sequentially. TDMA units were up 43% compared to Q2 last
year and up 147% sequentially. And, iDEN units were up 5% year-over-year and up 6%
Average selling prices were up 8% vs. Q2 last year, and down slightly, or 2%, sequentially.
Overall, ASP trends indicate a slight decline, although significantly less than historical industry
norms. We expect that our new products will continue to help offset normal price declines.
Operating earnings of $172 million were an improvement of $367 million versus last year and
$65 million sequentially. The 2nd-quarter operating earnings are net of a $30 million provision
which covers our exposure to WorldCom. Sequentially, the operating earnings improvements
were driven by higher market share and improved margins, and by leveraging our general and
administrative costs. Year-over-year, higher margins were delivered by favorable product mix,
and significant improvements in manufacturing and G&A costs.
Let me comment on the market and industry inventory levels:
Based on current market conditions, we estimate the total 2002 industry ship-in market will be
approximately 400 million units, and we estimate sell-through will be approximately 410 million
units. Additionally, we estimate that Q2 shipments were 91 million units – up 8% over 1st-
quarter shipments of approximately 85 million units. We estimate that Q1 and Q2 sell-through
was approximately 13 million higher than industry shipments. For Q3, we estimate industry
ship-in of 106 million units and sell-through of about 103 million units. And, for Q4, we expect
both ship-in and sell-through to be approximately 118 million units.
Let’s take a closer look at our products and technologies …
Momentum continued for our products – both at the entry level as well as for the V60, the A388
and the iDEN i90c. But, the headline grabber in Q2 was the V70 – a new form factor and a
“magazine cover model.”
In the 3rd quarter, we will start to ship the T720, a terrific new phone that features a large color
display, an enhanced user interface, and J2ME applications. At the entry level, we will begin
shipping the C330 series of products. The C330 is equipped with games, polyphonic audio,
EMS capabilities, and a variety of customization options for both carriers and consumers. We
also announced availability of the i95cl, the first Java-technology-enabled, color-display phone
available in the USA.
In addition to great products, we are continuing to strengthen our market share and brand
position through an aggressive global marketing strategy. “MOTO” is catching on. In China –
where we are the No. 1 handset supplier – for example, Motorola now enjoys top-of-mind brand
awareness across all age groups. In the United States, recent studies show increased preference
for the Motorola brand at carrier outlets nationwide, and our brand is gaining strength in key
Latin American markets, as well.
Let’s turn for a moment to new technologies. …
In the 1st half, we shipped nearly 1 million CDMA1X units, nearly all of them in Korea. Initial
uptake for 1X units in North America was slow because of carrier requirements for E911-capable
handsets. We now have a full complement of Assisted Global Positioning System (A-GPS) 1X
products – the V120e and the T720, which will start to ship in Q3, and the V60x, which will start
to ship in Q4. We expect 1X unit shipments to increase in Q3 and be followed by a very
significant increase in Q4. Our 1X portfolio also includes the entry-level V120x. For the 2nd
half, we expect approximately 40% of our CDMA shipments will be 1X units. …
Our rollout plans for UMTS and the A830 – the industry’s first dual-mode, feature-rich UMTS
handset – are progressing along with Hutchison’s schedule. I meet frequently with their
management to review progress, and I share their enthusiasm for this growth opportunity.
Looking ahead, we expect both sequential and calendar-year improvements in Q3 and Q4 sales,
operating earnings and operating margin. In addition, we expect to deliver a full-year gain in
market share. We expect sales to grow in the 2nd half by at least 5% compared to second half last
year and orders to be lower than sales by approximately $1 billion as we work down our backlog.
Let me reiterate that the projected lower order and backlog numbers reflect real improvements in
business processes rather than any weakness in our products or relationships with customers.
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,
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 am pleased to provide this update on the chip industry and Motorola’s semiconductor business,
including some important progress on our asset-light business model and further evidence that
our wireless platforms are gaining momentum.
June 30th ended the third quarter of recovery in the industry, with sales growth rates improving
steadily from the low point in December. Although still negative on a year-to-year basis,
industry revenue growth is moving toward positive territory. End markets fueling the early
stages of this industry recovery include wireless, automotive and consumer.
As noted in yesterday's earnings announcement, our orders in the second quarter were up 25%,
compared to the year-ago period. Orders were higher for all of our businesses, led by a very
significant increase for our Wireless and Broadband unit. Total segment sales were down about
3% versus the same period a year ago but 11% higher sequentially, with Wireless and Broadband
sales significantly higher versus the first quarter.
Our book-to-bill ratio remained positive, at 1.08 for the quarter, with corresponding ratios above
1.0 for all regions and for all market segments, except networking and computing. Total
backlog ended the quarter in excess of $1.1 billion, posting a 16% growth over the year-ago
On-going cost reduction actions contributed to a 75% improvement in our operating loss for the
second quarter versus a year ago and a 65% improvement over the previous quarter. Our
balance sheet continues to improve, with cash flow on track to meet our goal of net positive
operating cash flow for the full year.
As you know, we have lowered our break-even sales level dramatically during the past year and
a half. Our break-even level improved by another 7% during the quarter compared to Q1 and is
down by almost 19% in the first half of 2002. Break-even for the quarter totaled just under $5.5
billion annualized and we will continue to lower it in subsequent quarters. We expect to achieve
break-even in the third quarter.
We also are on track to reduce 6,000 additional employees in 2002, as announced last year. So
far this year, we reduced about 1,900 employees, reaching a headcount of 27,400 at quarter end.
Our announced goal is to have less than 24,000 employees by year-end.
We are continuing to make excellent progress in implementing our new business model, which
consists of three major elements. First, an increased focus on proprietary, higher-value products.
Second, a more efficient “asset-light” approach in technology and manufacturing to reduce our
fixed asset expenditures. And third, a much more aggressive approach to licensing intellectual
On the product front we are really building momentum, with more than 140 new products
scheduled for introduction this year across our businesses.
Most notable was the growing success of our Innovative Convergence platforms in the global
wireless handset market. We added four more customers during the second quarter. This brings
us to six merchant market customers, so far, who have signed up to use our silicon-to-software
We announced contracts with RTX Telecom of Denmark, SOLOMON Group of Taiwan and
Sewon Telecom of South Korea, all using the i.250 platform for 2.5G. The other was our 3G
contract with tier-one OEM, Siemens Information and Communications Mobile, in mid-April,
which I noted on our conference call last quarter.
Combined with our wins at Motorola PCS this means that we will be providing platform
solutions to companies representing more than 30% of the global cellular handset market. And
we expect to announce more wins soon.
We received orders for the i.250 platform during the second quarter and plan to ship production
volumes to Motorola PCS this quarter and to external customers in the fourth quarter.
Also during the quarter, our DragonBall MX1 device, which brings rich multimedia capabilities
to handheld computing devices and smart phones, was the first processor to be certified for the
new Palm OS 5 operating system. It also is being ported to all versions of the Symbian operating
system to speed development of Symbian-based 2.5G and 3G smart phones. The Electronics and
Telecommunications Research Institute of South Korea announced it will use our DragonBall
MX1 as the platform to create a state-of-the-art information appliance.
News from our transportation business included the selection by Hyundai Autonet of Motorola
as its premier partner for digital entertainment and Bluetooth hands-free “infotainment” services.
The second element of our new business model is the “asset-light” strategy. We are executing
per plan and on schedule to largely complete the first phase of our asset-light strategy for
manufacturing consolidations and facility closures. Our number of operating fabs will be
reduced to 8 by the first quarter of 2003, compared with 14 in operation at the beginning of 2002.
Our focus has shifted to aggressively implement the next phase of this asset-light strategy to
improve asset efficiency and maximize the return on both R&D and manufacturing outlays.
We achieved another important milestone this quarter, to augment our internal manufacturing
capacity with the greater use of foundries and contract final manufacturing. The announcement
last month of an expanded manufacturing agreement with Taiwan Semiconductor Manufacturing
Corporation gives us increased access to external production capacity and provides added
flexibility as business conditions fluctuate.
This expanded outsourcing deal with TSMC nicely complements the major technology
development alliance we announced with STMicroelectronics and Philips, which includes TSMC
as a foundry partner. The new Crolles2 R&D Center in France will provide us with timely
access and transition to 300mm wafer technology and joint development of deep sub-micron
CMOS technology, down to the 32 nano-meter node over the next 5 years.
One of several technologies we will be developing jointly through this alliance is MRAM, which
we believe could become the memory of choice for a wide range of applications. We achieved
another key milestone in MRAM development by demonstrating the industry’s first 1-megabit
device. We plan to sample MRAM devices next year and go into production in 2004.
We expect this technology alliance to reduce the cost of maintaining our CMOS process
technology roadmap by two-thirds, while also giving us 300mm pilot production. We believe we
will begin realizing the benefit of the alliance in late 2003.
The final element of our new business model is the aggressive growth of royalty revenues from
Intellectual Property licensing. We are making good progress toward achieving our goal of 50%
growth in royalty revenues this year versus last.
The formation of a new company, StarCore LLC, announced during the quarter will further
enhance royalty revenue opportunities from the open licensing of high-end DSP core
technologies. Infineon and Agere are our partners in this venture to develop and license scalable
cores based on the established StarCore DSP architecture for use in communications and
We also signed a major licensing deal with DuPont Air Products NanoMaterials to manufacture
and market our advanced slurry formulation for use in the copper interconnect manufacturing
process. The copper slurry market is estimated at about $50 million today, with substantial
growth expected over the next three years.
Let me conclude by repeating our pledge -- to drive a revitalized, profitable semiconductor
solutions business through the introduction of new higher-value products and careful asset
We are on plan and on schedule to deliver higher value products for top-line growth. We are
well along in implementing the next phase of our asset-light strategy to improve efficiency and
increase the return on R&D and manufacturing outlays. We are making good progress toward
achieving our goal of 50% growth in IP royalty revenues.
And 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. 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
BROADBAND COMMUNICATIONS SECTOR REMARKS
The Broadband Communications Segment reported orders of $420 million and sales of $554
million during the quarter. This compares to orders of $760 million and sales of $820 million in
the second quarter of last year. The lower orders and sales reflect reduced demand from
customers for subscriber equipment. To reflect uncertainty with respect to future short-term
sales mostly to Adelphia. For the quarter, operating earnings were $61 million and 11 percent of
sales, compared to $141 million and 17.2 percent of sales in the prior year. The reduction in
operating earnings reflects lower overall volume in the marketplace and a charge of $20 million
to reserve for the sectors exposure to uninsured Adelphia receivables. Despite these factors, the
Broadband segment was able to deliver solid operating profit performance, benefiting from
overhead structure actions and continued product cost reductions and supply chain savings.
During the quarter, we shipped approximately 1.5 million digital cable set-top terminals. Total
shipments now exceed 22 million. We also shipped more than 800,000 cable modems during the
quarter. This brings the total number of cable modems shipped to approximately 9 million.
Cable modem volumes were up sequentially for the second quarter in North America due, in
part, to our continued success with retail distribution. Industry data shows Motorola continues
to outsell our competitors in retail and our share continued to grow through Q2 to approximately
60%. During the quarter, Motorola reached an agreement to be the exclusive cable modem
vendor for Circuit City. We are also extremely pleased to report that five of Motorola’s data
products received CableLabs® DOCSIS 1.1 recognition during the quarter, bringing the total of
Motorola products certified to an industry record 32. Also during the quarter, Motorola
introduced a new, leading-edge home cable modem gateway. The SBG1000 is the first
combination high-speed cable modem router with a 5 port Ethernet switch and wireless home
Digital set-top shipments remained steady on a sequential basis as North American cable
operators continue to drive digital penetration. Motorola received customer commitments for
our newest DCT5100 set-top terminal from Comcast Communications and Shaw
Communications in Canada, demonstrating continued demand by operators in delivering
advanced applications and services such as high definition television programming.
Motorola’s Voice over IP initiatives continue on track with participation in more than twenty
trials and product placement in five initial commercial deployments. In July, Motorola
participated with Net2Phone and Liberty Cablevision of Puerto Rico in a successful pilot test of
the first fully managed end-to-end IP telephony service over broadband networks. The first call
was routed through Motorola’s multimedia terminal adaptor and its BSR 64000 broadband
I’d also like to take this opportunity to publicly congratulate Dan Moloney on his recent
appointment as president of the Broadband Communications Sector. Chris and I are proud to
have Dan as a member of the senior leadership team and are confident in his ability to
successfully lead the broadband sector.
COMMERCIAL, GOVERNMENT AND INDUSTRIAL SOLUTIONS SEGMENT
The Commercial, Government and Industrial Solutions Segment reported sales of $886 million,
which were flat compared to last year, but up 10% sequentially from the first quarter. Operating
earnings were $63 million, an increase of 5% on a year-over-year basis and an increase of 19%
sequentially. The higher sequential profits were the result of higher sales and continuing cost-
Our CGISS business continues to be impacted by the economic slowdown as well as
procurement delays caused by customer uncertainty over potential funding related to Homeland
Security. Despite this, however, the sector made solid progress during the quarter.
CGISS received large digital equipment orders in the U.S. from the City of Cincinnati, Winston-
Salem in North Carolina, and Glendale, Arizona , as well as from customers in Australia, China,
Colombia, German, Israel, Kenya, Puerto Rico, Spain, and Venezuela.
Of special note, the digital system order in Venezuela represents our first system sale into Latin
America based on the TETRA standard.
I’d also like to highlight Cincinnati, which will use their system for police and fire operations,
with other city departments joining the system at a later date. This reflects a growing trend for
multiple users in a geographic area to join together on a shared system that will allow them to
achieve interoperable communication for both routine and emergency situations.
On both a business and personal note, I recently had the honor and pleasure of attending the
inauguration of Motorola’s new TETRA system for the State of Vatican City. The system,
which can simultaneously transmit encrypted voice, video and data traffic, is designed to support
the critical communications needs of the State of Vatican City’s safety and security operations.
We continue to make solid progress in the area of integrated solutions, with the introduction of
the CivilScan Station 1000, a desktop fingerprinting solution for airports and other civil
applications. We also received our first contract for the Premier Handheld Citation application
from Houston, Texas. The application will enable police officers to wirelessly retrieve and relay
data, for example, to prepare and file traffic citations on the spot from a single handset.
During the quarter, CGISS kicked off a multi-city tour showcasing its extensive portfolio of
integrated communication and information solutions designed to address growing public safety
and security requirements worldwide. A comprehensive demonstration of Motorola homeland
security solutions will be available at Motorola’s annual financial analyst meeting to be held later
this month. CGISS has a history of leadership in its markets, and a deep understanding of the
mission-critical needs of public safety and enterprise customers. As government-funded
programs become solidified regarding Homeland Security, Motorola is well positioned to
GLOBAL TELECOM SOLUTIONS SEGMENT
The Global Telecom Solutions Segment reported sales of $1.24 billion, up sequentially by 16
percent from the first quarter. Segment orders were $1.07 billion, down sequentially 16 percent
from the first quarter. Most importantly, the Segment achieved positive operating earnings of
We expect the wireless infrastructure industry to decline by about 18% this year and expect no
growth next year. Given that outlook, it is critical that we continue to right size the business to
meet market conditions.
In June, we announced a further reduction in workforce that will take place beginning in Q3,
2002. This will enable us to reduce budgeted costs in 2002 to a level that is 24 percent below
budgeted costs in 2001 and we will further reduce budgeted costs in 2003.
GTSS is demonstrating its strong track record and leadership in CDMA. KDDI in Japan
surpassed more than 1.15 million CDMA2000 1X mobile subscribers through June 30, three
months since the introduction of 1X voice and data service offerings over its Motorola-supplied
nationwide CDMA network.
The UMTS Radio Access Network contract for Hutchison Australia is proceeding according to
schedule. Motorola has delivered over 80 Node B’s to Australia and the UMTS trial continues to
go well and we are on target to support the planned network launch.
The Segment is reinforcing its strong position in emerging markets. Contracts totaling $46
million recently have been signed in the Middle East region, which includes a $17 million GSM
contract where a competitor’s equipment is being replaced.
In China, the world’s most significant emerging market, Motorola maintains a strong market
share position with new contract wins announced in the second quarter. GTSS announced the
signing of four GSM contracts totaling more than $100 million with China Mobile GTSS will be
replacing competitors’ equipment in two cities for this customer.
Our focus on services and software is continuing. In Q2 2002, China Mobile signed significant
contracts with GTSS for location based services, value added services and for our Network
Support Program. GTSS also launched its Network Support Program in Latin America in Q2,
mirroring a similar program launched in the European and Middle East regions earlier this year.
During the quarter, GTSS completed software release 16.0 upgrades in all Sprint PCS and
ALLTEL CDMA 1X markets.
Verizon Wireless selected Motorola as a gateway provider for its short messaging service
enabling it to provide SMS interoperability among different carriers.
As previously conveyed, the Segment continues to focus on operational excellence, lowering the
break-even point while continuing to invest in its future the growth technologies, growing its
service business and software sales and executing on existing customer commitments and
winning new customers.
I’ll now close with some overall Motorola comments:
1. On June 27th we announced action plans to substantially complete the restructuring of the
company. These additional actions, for which special charges were largely recorded in
the second quarter, generated minimal savings in the second quarter and are expected to
result in savings for the remainder of 2002 of approximately $100 million, savings in
2003 of approximately $500 million and once fully implemented by the middle of 2003,
annualized savings of approximately $700 million thereafter.
2. We reduced our employee population by approximately 5,000 during the second quarter
to a level of 102,000. Previously announced reductions not yet implemented, along with
the June 27th announcement of an additional reduction of 7,000 employees, are expected
to result in an employee population of approximately 93,000 by the middle of 2003.
3. As Dave Devonshire said earlier, we remain highly focused on maintaining a strong cash
position and a strong balance sheet and we again made good progress during the second
quarter of 2002. On a year-to-date basis accounts receivable and inventories have been
reduced by almost $700 million; depreciation has exceeded capital expenditures by $800
million. Year to date we have paid $700 million in restructuring and Iridium related costs
and yet, in total, we still generated approximately $700 million of positive operating cash
flow, over $500 million of which occurred in the second quarter. Our net debt has
declined by about $600 million since the beginning of the year.
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 also pleased with the progress our Semiconductor and Global Telecom Solutions
segments have made in revising their business models, improving their gross margins
and reducing their cost structures.
6. Our guidance for sales in the third quarter of 2002 is sales of $6.7 billion, approximately
flat with the second quarter. We expect to generate operating earnings of 5 cents per
share, excluding any impact of special items.
7. Our guidance for the fourth quarter of 2002 is sales of approximately $7.5 billion and
operating earnings per share of 14 cents, excluding the impact of any special items.
8. We have just begun our planning process for 2003 and we currently believe that, barring
any unforeseen economic or political disruptions or other events that cause the company
to record special items of expense or income, the company can achieve a sales level of $
29 billion and with sales at that level, the current consensus expectation of earnings per
share of 45 cents is achievable.
Now here is Dave Devonshire to give you our third quarter guidance by segment.
DAVE DEVONSHIRE’S 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 3rd QTR. 2001 VERSUS 2nd QTR. 2002
OPR. EARNINGS OPR. EARNINGS
% OF SALES % OF SALES
Personal Communications Up Up Up Up
B/Even vs. B/Even vs.
Global Telecom Solutions Down Significantly Down
Commercial/Government/Industrial Down Flat Down Flat
Broadband Communications Flat Flat
Semiconductor Up B/Even vs. Loss Up B/Even vs. Loss
Integrated Electronics Up Profit vs. Loss Down Flat
Other Products Flat Flat 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.
During this call we have made a number of forward-looking statements that are based on
current expectations and involve risks and uncertainties. Such forward-looking statements
include, but are not limited to, our comments and answers relating to the following topics: (1)
research and development expenses; (2) capital expenditures; (3) depreciation expense; (4) the
timing, sales impact and pricing of new products; (5) order and backlog positions over the next
several quarters, including the impact of new business models on these numbers; (6) trends in
average selling prices: (7) projected worldwide industry shipments of wireless handsets; (8) the
introduction of new products and technologies and their impact on financial performance; (9) the
volume of product orders and shipments; (10) sales, profitability, cash flow, operating earnings
and market share in our various businesses; (11) worldwide semiconductor industry growth;
(12) the implementation and effectiveness of our “asset-light” semiconductor business model;
(13) the expected timing for completion of our restructuring actions, including the reduction of
our employee population and the closing of facilities; (14) future benefits from strategic and
technological alliances; (15) IP royalty revenues; (16) the size of the copper slurry market; (17)
plans to repatriate cash and reduce debt; (18) worldwide wireless infrastructure industry growth;
(19) reductions of budgeted costs in the Global Telecom Solutions segment; (20) the amount and
timing of charges to be taken in connection with our restructuring actions; (21) the impact of our
restructuring actions on our financial performance, including cost savings; (22) segment
guidance for the third quarter of 2002; (23) cash flow from operations and other cash flow
performance; and (24) expected Motorola sales and earnings per share for the third and fourth
quarters of 2002 and for the full year 2003.
Motorola’s actual results could differ materially from those stated in the forward looking
statements and information about factors that could cause such differences can be found in this
morning’s press release, on pages F-35 through F-40 of Motorola’s Proxy Statement for the 2002
annual meeting of stockholders and in Motorola’s other SEC filings.