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.
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
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
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
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
• 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 )
• 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
- 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
- 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.
- 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
Now I would like to introduce Mike Zafirovski, President of the Personal
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 …
• 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
• 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.
• 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
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
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
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
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
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.
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
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.
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.
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.
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
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
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
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
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
featured UMTS radio access network or UTRAN - with the highest capacity in the
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
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
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.
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
Comm., Gov’t. &Industrial Down Higher Down
Broadband Communications Down Lower Down
Semiconductor Down Lower Down
Integrated Electronics Down Lower Down
Other Products Down Lower Flat
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