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Q4 2001 Conference Call Opening Comments

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  • 1. MOTOROLA CONFERENCE CALL OPENING COMMENTS FOURTH QUARTER 2001 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 fourth quarter 2001 earnings conference call held on Wednesday, January 23, 2002. These opening remarks should be read in conjunction with Motorola's January 22nd, 2002 earnings press release and Motorola 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 Officer, Bob Growney, Vice-Chairman 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 ninety minutes 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 January 23, 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. We will be making forward-looking comments regarding the following: the timing, sales impact and pricing of new products; the timing and impact of cost reduction actions; worldwide industry shipments of wireless handsets in 2002; orders and shipments of GPRS handsets; profitability and market share of the Personal Communications segment in 2002; worldwide semiconductor industry growth in 2002 and 2003; contracts for new semiconductor technology; semiconductor manufacturing capacity; the timing of the semiconductor industry recovery; new semiconductor business model objectives; semiconductor fixed asset expenditures; cable equipment industry growth in 2002; two- way radio equipment industry growth in 2002; wireless infrastructure equipment industry growth in 2002; new wireless subscriber growth in India; costs and breakeven point for Motorola’s wireless infrastructure business; and expected Motorola sales and earnings per share for the first quarter and full year of 2002. Actual results could differ materially
  • 2. from these comments. Information about the factors that could cause such differences can be found in yesterday's earnings release and on pages F-29 through F-33 of Motorola's 2001 proxy statement for its 2001 annual meeting, and in other SEC filings. CHRIS GALVIN’S REMARKS • Experienced management team complemented by new talent Placed new leaders in 70 of Motorola’s 100 most important assignments within the last 18 months. Chose Ed Breen as new President and Chief Operating Officer. • Stabilized balance sheet and financial flexibility Generated more than $1.9B of positive operating cash flow in 2001 Completed over $4 billion of long term financing Reduced inventory by $2.5 billion and reduced receivables by $2.5 billion during 2001 Net Debt reduced by approximately $4 billion in 2001. Short term debt reduced by $5.5 billion to $870 million Ratio of net debt to net debt + equity reduced from 27% at end of 2000 down to 18% at end of 2001. • Reduced costs and manufacturing Headcount reduced 39,000 from peak headcount in late 2001 and announced plan to reduce headcount by an additional 9300 in 2002 Reduced breakeven sales level for Motorola by 20% Closed 5 businesses Announced Exit from nine manufacturing locations Resized 7 Manufacturing locations Growth through innovative products, software applications, customer relationships Return to profitability in PCS through the compelling new products and improved relationships with carriers including introduction of V.series 60 model and full GPRS portfolio. Recent i.250 platform wireless chipset announcement Received additional design wins enhancing our market leadership position in Telematics • Constant re-evaluation of strategy as high-tech environment changes • Launched a renewed China growth strategy • Launched an Asset-lite business model for SPS • Further pruned the business portfolio by divesting non strategic businesses. • Made significant progress in repositioning PCS to be more competitive in terms of cost and product lines • Further strengthened BCS' competitive position in Europe and US by making several strategic acquisitions and minority investments (including: River Delta, Synchronous, Callahan )
  • 3. • Further strengthened MCG's ability to offer integrated platforms, with the acquisition of Blue Wave Systems ED GAMS' REMARKS I'll begin my comments with a review of our overall corporate results for the fourth quarter of 2001, reported on the basis of continuing operations, excluding special items. For greater detail regarding sold businesses and special items. I encourage you to review yesterday’s earnings press release. - Fourth quarter sales decreased 25% versus a year ago. A net loss was incurred of $133 million compared with earnings of $508 million last year. This was a loss of 4 cents per share, compared with earnings per share of 16 cents last year. Net margin on sales was negative 1.2% versus a positive 3.7% a year ago. - Manufacturing margin for the fourth quarter declined to 33.3% of sales from 36.5% a year ago. The greatest declines occurred in the Semiconductor and Global Telecom Solutions segments. Manufacturing margin improved versus a year ago in the Personal Communications and Broadband Communications segments. Manufacturing margin improved by 2.9% sequentially versus the third quarter. - SG&A expenses in the fourth quarter were 11.7% of sales versus 12.7% of sales a year ago. - R&D expenses were 14.0% of sales in the fourth quarter versus 11.5% a year ago. The increase in percent of sales is due to the decline in sales, as R&D expenses were $104 million lower than a year ago. - Depreciation expense was 8.0% of sales versus 6.4% a year ago. Once again the increase in percent of sales is due to the decline in sales, as depreciation expense was $44 million lower than a year ago. - Fixed asset expenditures in the fourth quarter were $281 million versus $1.3 billion a year ago. Of this quarter’s total, $133 million was spent in the semiconductor business versus $726 million a year ago. For the full year, fixed asset expenditures were $1.32 billion versus $4.11 billion in 2000. Semiconductor fixed asset expenditures for the full year declined to $610 million from $2.4 billion in 2000. - Net interest expense was 1.5% of sales versus 0.7% a year ago.
  • 4. - From a total corporate perspective orders in the quarter were 32% lower than last year. Sequentially versus the third quarter orders decreased approximately $1.4 billion, or 19%. The only segment with a sequential increase in orders was the Commercial, Government & Industrial Systems segment. - The total corporate backlog position is down 16% versus a year ago. By segment, backlog is up in the Personal Communications segment, down in the Commercial, Government & Industrial Systems segment, and down significantly in the Broadband Communications, Global Telecom Solutions, Integrated Electronic Systems and Semiconductor segments. Sequentially versus the third quarter total backlog decreased approximately $1.5 billion, or 17%, with all segments having a sequential backlog decrease. - The market value of Motorola’s portfolio of publicly traded securities was valued at approximately $2.5 billion as of December 31, 2001.The largest of these investments are: in Nextel, with a market value of $1.2 billion and Callahan, with a market value of $355 million. No other individual investment represented more than 10% of the total market value. 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. MIKE ZAFIROVSKI’S REMARKS Good morning. I’m pleased to report that the Personal Communications Sector continued to make progress during the fourth quarter of 2001. … At mid-year, we told you that PCS would deliver a profitable second half, and the team has delivered. … As you’ll recall, in Q3, PCS basically broke even. Now, for Q4 of 2001, the PCS operating profit is $189M, or 6.4% operating margin. In the last four years only Q4 of 1999 had a higher profit percentage. In addition, PCS ended the year with an improved worldwide market-share position. We estimate our market share at 17% – which is flat with our latest view of Q3, and up from 15% at the end of Q4 2000. More than anyone, I know that we are a long way from declaring success. We have much more to do. But, I am very proud of the PCS people who have worked so hard to deliver improved results for our shareholders. The results were driven by numerous factors, including …
  • 5. • the implementation of our platform design strategy, • aggressive reductions in our product portfolio and parts complexity, • the introduction of 24 new, compelling products, • an aggressive cost restructuring program, • and markedly improved relationships with operators in every region. The year-to-year sales and shipment comparisons are less than inspiring due to the channel inventory build-up in Q4 2000. As a result, I believe that the recent past – the sequential results – are a better indicator of where we are headed, and that is where I will focus this morning. … Let’s take a look at some highlights: • Sales for the quarter were $3B, up 10% sequentially from the third quarter of 2001, up 19% from Q2 2001, and up 30% from Q1. … In Europe, Q4 sales were up very significantly, and in the Americas, sales were up. Meanwhile, in Asia sales were down, reflecting slowing regional growth and lower than anticipated Q4 net subscriber additions. However, despite Asia’s slowing growth, Motorola maintained its Number One share position in China. Also, we believe that Motorola inventory in the global channel at year-end was at or lower than Q3 levels. • Excluding the impact of the paging business, which – as Chris mentioned – we decided to exit, sales were up 13% sequentially from Q3. • Orders for the quarter were $2.2B, down 26% from the previous quarter, reflecting Q3’s very strong backlog position as well as seasonality in Q4 orders. • Despite lower orders in Q4, backlog at the end of 2001 was still strong at $2.5B – up 20% compared to $2.1B at the end of 2000 – and I am very pleased to report that momentum continues for our new products. … I’ll talk more about those in a few minutes. • Unit shipments for the quarter were 17.5M – up 11% from Q3 – resulting in an estimated ship-in market share of about 17%. • On a sequential basis compared to Q3, GSM unit shipments were up 16%, TDMA units were up 32%, and iDEN units were up 11%. We attribute all of these gains to increased momentum for new products introduced in Q3. CDMA unit shipments were down 2% due to a decline in sales at the low end. • Average selling prices were up 2% compared to Q3.
  • 6. • Excluding special items, PBT for the quarter was $189M, a $174M improvement from Q3, and a $106M improvement from last year. Most of that improvement was driven by increases in gross margin. As I have already pointed out, we have been working very hard to improve our profit position. PCS gross margins and operating margins have improved sequentially each of the last three quarters. Our total cost competitiveness efforts have reduced our cost structure by more than $1.5B on an annualized basis from Q4 2000 through Q4 2001. • PCS also generated positive cash flow for the fourth quarter in a row, bringing year-to-date positive cash flow to approximately $1.2B. This is a significant improvement over the negative cash flow in 2000. … Cash-flow results continue to be driven by dramatic improvements in our working capital performance. For example, inventory turns have more than doubled, accounts receivable weeks have improved by 22%, and capital expenditures are down by 79% versus 2000. • Just as important, employee and customer satisfaction ratings continued to improve in Q4, with both of these important groups expressing confidence and optimism about the future. Before discussing our new products and the outlook for the first quarter of 2002, let me make several comments on the market and industry inventory levels: We estimate that 2001 industry-wide ship-in numbers finished at about 375M units, which is down 10 to 15% range from 2000. Sell-through numbers finished at about 400M units, essentially flat with 2000. It’s important to point out that we have entered 2002 with industry channel inventories a bit higher than normally expected at this time of year. Even so, based on current conditions, we now expect the total 2002 ship-in market will be about 420 million units; however, that could go higher if the economy turns upward in the second half. … Let’s take a closer look at products and technologies … In CDMA, we are shipping and continue to win more customer approvals for our V120 and V60 and for the Timeport 270. These products are fashionable, functional and affordable. In the Americas, demand increased significantly for the V60, T270c, and T182. … In CDMA 1X, we partnered with China Unicom to be the first company in China to enable a live CDMA 1X call – and we accomplished this on October 23 in Beijing using the Motorola V67. In TDMA, we began volume shipments for the V.60t in Mexico, Brazil and the U.S. In GSM, we have our increasingly popular and iconic blends of style and technology – the Motorola V.100, V66 and V60. In Europe, these phones, as well as the productivity- enhancing A008 and the Timeport 280 are gaining popularity and increasing operator ARPU. Meanwhile, at the entry level, the feature-rich experience of our T191 and T193
  • 7. are winning customers and consumers in North America and Europe. … I want to remind everyone that most of these GSM phones are GPRS-enabled. For iDEN, we continued to expand the industry’s most comprehensive portfolio of Java- technology enabled products in North America. During Q4, we delivered the Motorola i90 and the i80 – the fourth and fifth products in our Java-enabled series. Now, let’s take a look at GPRS. … At the end of Q3, we had expected to ship 5M GPRS units by the end of 2001. At that time, we were operating under a higher industry ship-in forecast for Q4. Our GPRS unit shipments did not reach 5M because the overall market for GSM shipments was lower than anticipated. … • For the year, we shipped more than 4.1M GPRS units. … At the close of Q4, we had more than 2.4M GPRS units on order from more than 20 operators. We expect continued growth in orders and shipments during Q1 compared to Q4 for GPRS handset. … Our most recent GPRS introductions took place in North America, featuring the Timeport 280 and the T193. • To help fuel consumer demand and customer ARPU, during Q4 Motorola worked aggressively to expand the availability of applications capable of creating compelling consumer experiences. We announced agreements with such companies as … o AOL Time Warner for content and instant messaging; o Ztango for downloadable ring tones and personalization; o Cybiko and Chartwell Technology for wireless gaming based on Java technology. Looking ahead … - We started 2002 at the Consumer Electronics Show, where new Motorola products captured more than a dozen “Innovations” consumer-design awards. Also at CES, we introduced our first CDMA 1X phone for the Americas – the Motorola 120x. Features include text messaging, voice recognition and recording, enhanced personalization, Internet access, gaming, and – with accessories – MP3 player and FM stereo. Available this month, it’s expected to retail for less than $100. - In March, we will be at CeBIT to showcase innovations such as the Motorola V70, a new form factor and fashion statement, and our bar-raising UMTS 3G handsets. … Before the Q&A, Ed Gams will make general comments on 2002 regarding sequential Q4 to Q1 performance expectations. For my part, I will not offer any specific guidance or
  • 8. attempt to predict quarterly share. I will, however, say that we expect to deliver a profitable year and a full-year gain in market share. … Let me 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. In short, PCS is focused on doing what it takes to 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 Motorola’s semiconductor segment and the new business model we are implementing to return to profitable growth as the market recovers. To say that 2001 was a challenging year for the chip industry is a huge understatement. It was the worst year-over-year decline in history, down more than 30%. That is nearly double the previous worst decline in 1985. The good news is that recent market data strengthens our belief that the bottom of the downturn occurred in the third quarter. The Semiconductor Industry Association reported earlier this month that shipments grew in both October and November. There also is evidence that average selling prices have stabilized and growing signs of an overall economic recovery underscore our belief that chip demand will accelerate this year. Therefore, we are continuing to project industry sales growth ranging from 5 to 10% for the full year, the same as our guidance at the end of the third quarter. We expect the industry to show sequential improvement each quarter with stronger acceleration in the second half. This should lead to considerably higher industry sales in 2003. As you saw in yesterday’s earnings announcement our orders in the fourth quarter declined 36% and sales were 41% below the year-ago level.
  • 9. On a regional basis orders were higher and sales were down slightly in Asia-Pacific. Orders and sales were down significantly in the Americas, Europe and Japan. Among major markets orders and sales were down in transportation and standard products, down significantly in wireless and broadband and down very significantly in networking and computing. However, the news is more encouraging on a sequential basis. While orders overall were down about 9% compared to the third quarter we experienced an increase in Asia-Pacific and in our networking and computing, and transportation and standard products markets. Sales were 4% higher overall, with an increase in Asia-Pacific and up slightly in the Americas and a significant increase in wireless and broadband. Ongoing cost-reduction actions contributed to a smaller operating loss in the fourth quarter or an improvement of 7% over the third quarter. Our balance sheet continued to improve with positive cash flow, good receivables, and lower inventory levels. Looking forward, as a part of the company’s ongoing cost-reduction actions, which were announced December 18th, the Semiconductor Products Sector is phasing out an additional wafer fabrication facility and three assembly/test facilities over the next 9 to 15 months. These actions are expected to reduce our manufacturing census by about 2,500 employees. This is in addition to a reduction of 2,000 jobs still to be realized from previously announced shutdowns. Also, as part of the cost reduction actions announced on December 18th, we are eliminating 1,500 jobs in non-manufacturing areas, primarily in the SG&A category, as we size our infrastructure to be consistent with sales levels and realize greater efficiencies in our operations. When completed we will have reduced our employee headcount by approximately 6,000 people in 2002, for a worldwide employment level of 24,000 or 10,000 less than we had at the beginning of 2001. When these factory closures and consolidations are finalized we will have 8 operational wafer fabs and 2 high-volume assembly/test facilities. With this efficient, consolidated asset base and the ongoing support of our supplier-partners we will have plenty of capacity to fully support our customers’ needs, now and in the future. The consolidation of our manufacturing footprint is part of the new business model we discussed at the Motorola Financial Analysts’ Meeting last summer. We have defined this business model and its implementation is under way. It consists of three major elements. First, is 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.
  • 10. We are making good progress on the product front. In wireless we introduced our new “Innovative Convergence” platforms for the cellular handset market and they have attracted considerable customer interest. We announced our first customer win last week with Benq Corporation, formerly Acer Communication and Multimedia. Benq is one of Taiwan’s leading original design manufacturers of mobile phones and will develop GSM/GPRS handsets using our technologies. Negotiations with other customers are proceeding and we expect to announce additional contracts during the first half of this year. In networking we are expanding the penetration of our microprocessor architectures into various networking applications. Our MPC family of microprocessors, that are PowerPC architecture compatible, is winning numerous designs and we expect to announce a 1- gigahertz version this year to continue our leadership in this market. We also are planning to introduce new members of our C-Port family of communications and network processors for the wired networking market. In transportation, we committed to expand into higher margin platform applications. We now have more than 12 wins from automotive customers who plan to use our MobilGT architecture for Driver Information Systems in vehicles, with production expected to begin this year. We also announced design wins totaling $1 billion, with more than 20 of the world’s leading suppliers to the global auto industry, for our advanced HCS-12 micro-controller family in various automotive applications. We plan to aggressively push the HCS-12 family into other markets and through distribution this year to migrate customers from older 8-bit architectures to this higher performance, higher margin 16-bit line. So, we are confident that our product upgrade strategy is well on track. The second element of our new business model is the “asset light” strategy. As I noted earlier, it is being realized through further consolidation of SPS-owned factories into a more cost-effective and efficient footprint, along with greater use of foundries in the future and engaging with partners for new capacity and process development. As we close our older, less efficient factories we will move the loadings from these factories into our remaining footprint, thus increasing our utilization rates and reducing costs. Moving forward, we are committed to substantially decreasing our fixed asset expenditures as a percent of sales, while improving our cash flow and increasing our output, efficiency, flexibility and RONA. To illustrate this point, this year we plan to spend approximately $200 million in capital, primarily to support our specialized technologies such as silicon germanium carbon and RF BiCMOS. Our capital expenditures last year were $610 million, a substantial drop from the $2.4 billion we spent in 2000.
  • 11. However, I want to emphasize that “asset light” does not mean “R&D light.” We will maintain our substantial investments in new platform, product and process development, driving innovation and competitive advantage. In fact, we previewed our next-generation 0.10-micron CMOS process technology at an industry conference last month. This “HiP8” technology realizes a 30% reduction in line- width over our current HiP7 0.13-micron generation, pointing the way to future products with more functions and features than today’s and more cost-effectively. This high- performance, low-power technology is expected to use our fourth-generation of copper interconnect and to complete process certification in December. Helping to pay for these R&D investments is the third element of our new business model, expanded Intellectual Property licensing. This initiative began in the second half of 2001, resulting in a 25% increase in royalties over 2000. Our goal is a further 50% increase this year, and we believe that we can make this a substantial, stable factor in our business going forward. Included in this initiative are patent cross-licenses, process technology licenses and agreements with partners to commercialize manufacturing invention and know-how that we have created in the course of conducting business. Well I’ll conclude where I began, that 2001 was, indeed, the most challenging year in history for the chip industry and our semiconductor business. Nonetheless we refocused ourselves on the wireless communications and networking markets, which have a tremendous future. We are reinvigorating our transportation and standards products businesses to provide a strong financial base and cash flow. We have launched a bold initiative into the merchant market for wireless chipsets and introduced a number of innovative platforms and products in networking, wireless and transportation. Now with this new model for funding and running our business and a return to industry growth in the 5 to 10% range, we believe the Semiconductor Products Sector can achieve modest profitability in the fourth quarter of the year. As sales increase we can see a margin flow through greater than 50%. And beyond 2002 go on to produce the sustainable growth and profitability we are capable of and our shareholders deserve. Thank you. ED BREEN’S REMARKS Broadband Communications Segment The Broadband Communications Segment reported orders of $525 million and sales of $580 million during the quarter. This compares to orders of $1.1 billion and sales of $1.1 billion in the fourth quarter of last year. For the quarter, operating profits, excluding
  • 12. special items, were 14.8% as a percentage of sales, down slightly from the prior year. For the year 2001, the segment set a record with pre-tax profits, excluding special items, at 16.8% of sales. Despite industry weakness we maintain solid operating profit performance with aggressive product cost reductions, supply chain savings, and overhead cost controls. Our gross margins increased every quarter throughout the year. During the quarter, we shipped approximately 1.5 million digital set-top terminals; total shipments now exceed 19 million. We also shipped approximately 1 million modems during the quarter, matching the record high set during the 3rd quarter, last year. This brings the total number of modems shipped to 7 million. Cable modem sales increased sequentially during the quarter. Our growing success in retail is very exciting, with more than 10% of the total modem shipments for the quarter coming from our retail distribution channels. We are clearly leveraging the value of the Motorola brand and our successful partnerships with our key retail partners such as Circuit City, Best Buy and The Wiz. We are also pleased with our digital cable set-top performance, where sales remained steady on a sequential basis. In recognition of a significant milestone, Motorola honored the shipment of its two-millionth digital set-top to Comcast Communications during the quarter. Additionally, AT&T Broadband agreed to purchase 200,000 DCT2500s, Motorola’s newest advanced interactive set-top. Motorola’s Voice-over-IP trials and deployments remain successful, steadily growing in both North America and Europe. In Germany, we continued to serve as a key technology partner to Callahan Associates for their deployment of advanced network services and products. Motorola supplied Callahan Associates, in Germany, with volume shipments of multi-media telephony/data adaptors, as well as network critical RF and optical infrastructure solutions. These products will support enhanced service deployments such as high-speed Internet and Voice-over-IP telephony services. Russia Broadband Communications also selected Motorola as a key technology supplier for the delivery of advanced, interactive broadband data, voice and video services to more than one million homes in its Moscow Region. During the quarter, we completed the acquisition of RiverDelta Networks and are seeing significant interest from customers as evidenced by Cox Communications’ orders for our Broadband Services Router products. We also finalized the acquisition of Synchronous, Incorporated at the beginning of 2002. Both of these acquisitions are important to the long-term growth strategy of our IP network infrastructure business and the deployment of “the triple play” broadband services on a worldwide basis. During 2001 we have positioned ourselves well for the future. We completed two key acquisitions to fill out our portfolio. We have a complete comprehensive IP telephony portfolio and product now commercially being deployed. We have introduced key
  • 13. international set-top products. Most importantly, clarity to industry MSO ownership is occurring with ATT/Comcast and European consolidation continuing in Europe. Commercial, Government and Industrial Systems Segment The Commercial, Government and Industrial Systems Segment reported sales of $1.2 billion and profits, excluding special items, of $167 million for the fourth quarter. This is a significant improvement on a sequential basis as a result of new generation product shipments and continued cost containment actions. During the quarter, Motorola achieved a number of digital technology milestones. Motorola became the first company to deliver IP-based, Project 25-compliant equipment with its ASTRO 25 Voice-over-IP communications system. Project-25 is the U.S. Public Safety standard for digital radio communications. Customers receiving this state-of-the- art technology include the states of Minnesota, Michigan, and Colorado; Hamilton County in Ohio; Phoenix and Mesa, Arizona; as well as Austin and Travis County in Texas. In addition, Motorola began shipping new-generation Project 25- and TETRA-compatible portable and mobile radios. During the quarter, we announced Dimetra IP, the industry’s first fully IP-based, TETRA-compliant system. Trials are expected to be underway by the second half of 2002, and the technology is expected to be implemented by customers such as London Underground and Airwave for the UK police force. In the area of Integrated Solutions, Motorola’s Printrak subsidiary became the first certified vendor for Canadian criminal and applicant fingerprint submissions and was selected by the London Fire Authority in the U.K. to supply an advanced command and control emergency response system. Computer Aided Dispatch and Records Management products were successfully deployed at several large public safety agencies in North America and Europe. We also continued to expand our portfolio of offerings with our new Offendertrak product for operations management of jails and corrections facilities. Looking ahead, we see a solid worldwide business in CGISS and as government-funded programs become solidified regarding homeland security in the U.S., Motorola will be well positioned to participate in this upside opportunity. We will continue our focus on growing world wide market share and improving profitability, while positioning this business for success in the emerging market for integrated solutions.
  • 14. Global Telecom Solutions Segment The Global Telecom Solutions Segment reported orders of $1.1 billion and sales of $1.4 billion during the quarter, down significantly on a sequential basis and from last year. Excluding special items, the segment incurred an operating loss of $120 million compared with an operating profit of $193 million a year ago. The wireless infrastructure industry experienced one of its most challenging years in 2001 after experiencing 23% growth in 2000. The past year has seen a flat to moderate decline in world wide wireless infrastructure sales, we believe that industry sales could decline as much as 10% in 2002 before growth returns in 2003. Under the new leadership of Adrian Nemcek, the focus of the segment is on Back to Basics and Operational Excellence. Budgeted costs during the quarter were reduced 25% compared to the same quarter last year. Aggressive, previously announced, headcount and planned facility reductions are expected to substantially reduce budgeted costs again in 2002 and lower the break-even point even further for this segment. Engineering investments will be minimally impacted by these cost reductions and we plan to continue to sustain our investments in GSM, CDMA and iDEN and the 3rd generation growth technologies of 1X. As part of the drive toward operational excellence, the segment plans to increasingly focus on providing margin enhancing, value-added software and services to its large installed base of customers and target to achieve growth in this area in 2002. In the Americas, we are on track toward completing the upgrades for Verizon, Sprint and Alltel in preparation for their third generation CDMA 1X launches in the early part of this year. Motorola announced new enhancements recently to its iDEN wireless network technology that are expected to double voice capacity. This will enable Nextel to maintain voice quality and leverage existing infrastructure more efficiently to expand into new market segments and extend their business competitiveness. These enhancements are expected to become available in 2003. In Europe, Motorola’s GPRS networks continued to experience good performance. Tests conducted recently in a multi-vendor network of a large western European carrier resulted in the Motorola supplied part of the network achieving the highest average throughput and the lowest latency. Motorola now has 22 GPRS infrastructure contracts with 15 operators worldwide. While subscriber take-up of new GPRS services has been slower than the industry hoped, we remain very positive about GPRS as a key tool for operators to increase ARPU in 2002. We intend to leverage our proven performance in GPRS to UMTS. We successfully tested this 3G technology in our labs during the quarter and are scheduled to begin field trials in the third quarter of this year. When operators are fully ready to launch commercially, Motorola intends to be an industry leader in having a competitively
  • 15. featured UMTS radio access network or UTRAN - with the highest capacity in the smallest footprint. The Asia-Pacific region continues seeing rapid growth, particularly in China where Motorola has the Number 1 position in CDMA and Number 2 position in GSM based on served subscribers on the Radio Access Network. On Jan. 8, 2002, China Unicom launched its first nationwide CDMA services on Motorola’s network. In October, 2001, the two companies completed the first live 1X data call in Beijing. Motorola signed $248 million in GSM contracts in India, a major emerging market that is expected to add the third largest number of new subscribers over the next 5 years. During the quarter, we continued to lead the industry in infrastructure market share in this country. In Japan, live CDMA 1X data calls were made with KDDI in Japan, which supports nearly 16 million customers on its Motorola- nationwide network. Additionally, nearly nine million mobile Internet subscribers are being served on Motorola’s advanced wireless packet data networks. Looking ahead, the segment will continue to focus on operational excellence and continue to reduce the breakeven point of the sector so that we can hasten the return to profitability. I’ll now close my comments with the following points: 1. We are very pleased with the progress being made in our handset business to improve profitability and growth in market share. 2. We are planning conservatively for 2002 in terms of our budgets, employee population and capital expenditures in order to achieve a strong profit flow through as sales growth returns in our businesses. 3. 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. 4. We expect to take further actions by the end of the first quarter to reduce costs and lower the company’s break-even point. Those actions are expected to result in savings in 2002 of approximately an additional $200 million. 5. Our guidance for sales in the first quarter of 2002 is sales of $6.0 billion to $6.1 billion, which is a slightly larger than historically normal sequential fourth to first quarter decline and about $200 million less than we were expecting when we had our December 18th announcement, as orders in Q4 were lower than expected. However, we continue to expect to incur a pro-forma operating loss of between 11 and 14 cents per share, as we stated in our December 18th press release.
  • 16. 6. 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 expect to return to profitability in the third quarter of 2002 and be profitable for the full year. The current consensus earnings expectation for the full year of 2002 is 4 cents per share and we believe that this level of earnings is not only achievable, but that it can be exceeded. If annual sales are near the high end of our guidance range and if the handset and semiconductor industry growth expectations that Mike Zafirovski and Fred Shlapak mentioned earlier occur, then the gross margin improvements that we would then anticipate in these two businesses coupled with the savings from cost reductions make it possible for the company to earn the 15 cents per share in 2002 we discussed with you on our December 18th conference call. 7. Our expectation of a return to profitability on lower sales is based on a three primary factors: (a) cost reduction actions announced last year, with additional steps to be taken this year, (b) improved manufacturing margin in handsets, coupled with double digit sales growth in that business and (c) improved manufacturing margin in semiconductors as that industry recovers, resulting from higher utilization of fewer, more efficient wafer fabs. 8. We remain highly focused on maintaining a strong cash position and a strong balance sheet and we made great progress during 2001. We start 2002 with $4.1 billion less net debt than we had at the start of 2001. We have improved our ratio of net debt to net debt plus equity to 18% versus 27% a year ago. 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 1st QTR. 2001 VERSUS 4th QTR. 2001 SALES OPR. MARGIN SALES OPR. MARGIN Personal Communications Up Profit vs. Loss Down Lower Global Telecom Solutions Down Loss vs. Profit Down Higher Significantly Comm., Gov’t. &Industrial Down Higher Down Lower Significantly Broadband Communications Down Lower Down Lower Significantly
  • 17. Semiconductor Down Lower Down Lower Significantly Integrated Electronics Down Lower Down Higher Other Products Down Lower Flat Higher Significantly Participating in our question and answer session along with our previous speakers will be Bob Growney, Vice-Chairman. 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. Our answers relating to expectations for the wireless infrastructure industry; growth expectations in our various businesses; outlook for handsets; goals for manufacturing margins; performance in the China market; cash flow projections; profitability in our various businesses, expectations for average selling prices; participation in the GSM market, new product appreciations; financial performance in 2002, and market for set- tops in 2002 and 2003, are forward looking and involve risks and uncertainties. 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 yesterday’s earnings press release, on pages F-29 through F-33 of Motorola’s Proxy Statement for the 2001 annual meeting of stockholders and in Motorola’s other SEC filings.