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Motorola Handset Division Trims Losses

Schaumburg, Ill. – Motorola’s cellular handset division
trimmed its operating losses in the second quarter on a sequential and
year-over-year basis while boosting revenues 1.6 percent on a sequential basis
to $1.83 billion.

Quarterly operating losses shrank for the third consecutive quarter,
and Motorola co-CEO Sanjay Jha forecast a
“further reduction in operating losses” in the current quarter. He said he
would “be disappointed” if the division did not break even on a quarterly basis
sometime next year.

Division operating losses fell to $253 million in the second
quarter from the first quarter’s $381 million loss and a year-ago loss of $346
million. Losses peaked in 2008’s third quarter at $840 million. Operating
losses fell largely because of major cost-cutting initiatives, including a 30
percent workforce reduction and better demand planning with carriers. Jha described
the cuts so far as “getting us close to a competitive cost structure.” Modest
cuts might still be in the offing, he said.

On the revenue side of the company’s financial report, Motorola
said second-quarter revenues, though up sequentially, were off 45 percent from
the year-ago quarter. Likewise, first-half revenues were off 45 percent to
$3.63 billion.

Third-quarter revenues will be “comparable” to the second
quarter’s, Jha said, contending that the division is not focused on market
share and volume but on operating profit, gross margins and high average
selling prices. Those three metrics will rise with the fourth-quarter launch of
Motorola’s first two Android-based smartphones through two unnamed major North
American carriers, he said. The launches will “get us back in the game” in
smartphones, he promised. The division signed contracts with the two carriers and
will ship “in meaningful volumes” in the fourth quarter so carriers can “get
behind the devices in a meaningful way,” Jha said.

In the first quarter of 2010, several additional Android models
will ship as the division ratchets up its presence in the higher margin, lower
volume smartphone market and reduces its reliance on lower-price feature phones
and voice-centric phones in 2010, he continued.

Next year, “the majority of new devices will be smartphones,” Jha
said. The division, however, will continue to offer feature and voice-centric
phones because “some customers want a full portfolio of products from us,” he emphasized.
Those products, however, will be developed through original design manufacturer
partners. Smartphones will continue to be developed in-house, including Android
models that the company wants to drive to feature-phone price points in a
“profitable way,” Jha said.

In 2010, Motorola expects to offer a “comparable” number of SKUs compared
to 2009, but the gross margins on the devices “will be meaningfully better”
because of the company’s smartphone focus, he said. Right now, he said,
Motorola’s handset gross margins “are below industry levels, and we want to be
comparable.” For the Motorola’s Androids launched in the fourth quarter, he
said he “expects industry-comparable margins.”

Jha predicted “quite a battle in the smartphone marketplace” in
the fourth quarter. Carriers know they will have to support their smartphone
sales “with substantial marketing help,” and “we hope to get some of that.” Likewise,
Jha called it probable that the industry “will see us have a presence with more
media advertising” in the fourth quarter.

As for Motorola’s iDEN-network portfolio, Jha said the company is
still getting “pretty good traction with iDEN,” in part because of Sprint’s
more aggressive prepaid focus and improved relationships with other
iDEN-network carriers. In 2010, Jha said, Motorola will refresh its iDEN
portfolio and offer Android-based iDEN phone.

Longer term, Motorola still plans to sell off its handset
division, but it still hasn’t set a timetable. The timing of the separation
will depend on the economy, the division’s performance and stability in the
handset market, he said.

At Motorola’s other two divisions, revenues were down for the
quarter and half but not nearly as much as they were in the handset division. The
divisions’ earnings were also down, but both continued to post operating
profits. Handset accounted for 33.3 percent of Motorola’s second-quarter

All told, the company’s consolidated revenues were off 32 percent
for the quarter to $5.5 billion and off 30 percent for the half to $10.9
billion. Second-quarter consolidated operating profits grew to $10 million from
the year-ago $5 million, but the first half posted a $439 million operating
loss, up from the year-ago $264 million loss.