Q3 2004 Motorola Inc. Earnings Conference Call Presentation

Q3 EARNINGS RELEASE – October 19, 2004 Slide 1

Motorola Q3 2004 Earnings Release Conference Call

October 19, 2004


Ed GamsSenior Vice President

of Investor Relations

Motorola Inc.

3Q3 EARNINGS RELEASE – October 19, 2004 Slide

Safe Harbor StatementA number of forward-looking statements will be made during this conference call. Forward-looking statements are any statements that are not historical facts. These forward-looking statements are based on the current expectations of Motorola and there can be no assurance that such expectations will prove to be correct. Because forward-looking statements involve risks and uncertainties, Motorola’s actual results could differ materially from these statements. Information about factors that could cause, and in some cases have caused, such differences can be found in this afternoon’s earnings press release, on pages 76 through 85 of Motorola’s 2003 Annual Report on Form 10-K.

This presentation is being made on the afternoon of October 19, 2004. The content of this presentation contains time-sensitive information that is accurate only as of the time hereof. If any portion of this presentation is rebroadcast, retransmitted or redistributed at a later date, Motorola will not be reviewing or updating the material that is contained herein.

MOTOROLA and the Stylized M Logo are registered in the US Patent & Trademark Office. All other product or service names are the property of their respective owners. © Motorola, Inc. 2004


Ed ZanderChief Executive Officer

Chairman of the Board of Directors

Motorola Inc.


David DevonshireChief Financial Officer

Executive Vice PresidentMotorola Inc.


Motorola Inc. Financial Results

313%$ 0.05$0.20Earnings Per Share GAAP

26%$6,829$8,624Sales $M

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Q3’04/Q3’03

Q3

2003

Q3

2004

• Another Very Strong Quarter in Sales and Earnings Per Share Growth

• EPS Includes A $30M ($0.01 Per Share) Minority Interest Expense For FSL


Gross Margin

% of Sales

34.0%

36.2%

30%

35%

40%

Q3'03 Q3'04

§ Gross Margin Performance Was Strong§ Improved By 220 Basis Points From Q3 Last Year § Improvement In Each of Our Four Largest Segments


Research & Development Expenses$ in Millions

13.8%

11.6%

$500

$750

$1,000

Q3'03 Q3'045.0%

10.0%

15.0%

§ R&D for the Quarter Was Up Slightly vs. Q3, 2003 But Improved as a Percent of Sales by 220 Basis Points§ Maintenance and Focus on R&D Spending is Resulting in Stronger Sales and Higher Gross Margin


Selling, General and Administrative Expenses$ in Millions

15.8%14.8%

$500

$1,000

$1,500

Q3'03 Q3'0410.0%

15.0%

20.0%

§ SG&A Decreased as a % of Sales vs. Last Year By 100 Basis Points§ Dollar Increase vs. Q3’03 is Largely Attributable to:

§ An Increase in Sales Commissions Related to the 26% Increase in Sales§ An Increase in Our Brand Advertising§ An Increase in Incentive Accruals Due to Strength of YTD Performance


Operating Margin %% of Sales

3.9%

9.7%8.3%

3%

5%

7%

9%

11%

Q3'03 Q2'04 Q3'04

§ This is Our Strongest Q3 Operating Margin in Several Years§ Higher Gross Margin and Lower R&D Percent to Sales Contributed to the Operating Margin Improvement Since Last Year.§ GAAP Operating Margin Declined Sequentially vs. Q2. Excluding $67M in Expense Related to the Impairment of Goodwill, $55M in Expense for Severance, and $19M of Expense Related to the Separation of FSL, Operating Margin Improved.

9.9%

4.4%

GAAP

Excluding Reorg./GoodwillImpairment/ FSLSeparationExpense

9.8%


Cash Flow and Debt

$1.0

($0.3)

$1.3

Q3 2004

$2.1

($0.7)

$2.8

Annual 2003

($ in Billions)

Free Cash Flow

Capital Expenditures

Operating Cash Flow

§ Approx. $1.3B of Positive Operating Cash Flow in the Quarter, Approx. $1.0B of Free Cash Flow in the Quarter§§ Fifteenth Consecutive Quarter of Positive Operating Cash Flow§ $4.4B Net Cash Positive vs. Net Debt at Beginning of 2004

$4.4

$11.0

($6.6)

($6.3)

($0.3)

Q3

2004

($0.1)Net Cash/(Net Debt)

$8.0Cash/Equiv/Mkt Sec

($8.1)TOTAL DEBT

($7.2)Long Term / TOPrS

($0.9)Short Term/Curr

Year-End2003

Cash Flow Debt

($ in Billions)


Q4 2004 Guidance

$0.23-$0.26Earnings Per Share

Guidance

$9.3B-$9.6B

Q4 2004

Sales


Mike ZafirovskiPresident and

Chief Operating Officer

Motorola Inc.


Motorola in 2004n Accelerated Earnings Improvement

– Narrow Gap to Targeted Business Model

– Accelerated Progress on Key Initiatives (DSS)

– Further Reductions in Cost Structure

– Increase Revenue per Employee

n Improve New Product Execution

n Take Customer Relationships to Next Level

n Grow Share in Most Markets

Work in Process …. With Momentum


Q3 Summary Results By Segment (2004 vs. 2003)

173%26%Motorola

Profit vs. Loss31%Broadband Communications

(28%)22%Integrated Electronics Systems

27%12%Commercial, Gov’t, Industrial Solutions

187%24%Global Telecom Solutions

Profit vs. Loss17%Freescale Semiconductor

165%34%Personal Communications

Operating Earnings GrowthSales Growth

Broad Based Improvements


Personal Communications Segment

§ Q3 Shipment of 23.3M Units, Up 15% Over Q3’03 § Q3 Channel Inventory Lowest in Years§ ASP Rose by 19% vs. Q3’03 and Were Up 2% Sequentially§ Expect Q4 Share Growth

5.0 ppts5.0%10.0%Operating Margin

165%$147$390Operating Earnings $M

34%$2,924$3,912Sales $M

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Q3’04/Q3’03

Q3

2003

Q3

2004


Q3 2004: Sampling of New Products

V400p

V180 C115

Motorola V3 / RAZR MPx220

E680

A780-Edge

i630 i833

A860GSM/GPRS/CDMA

C155

V872

V220


PCS Q3’04 – Other Developments

n Appointed a New Sector President

n Began Shipping 17 New Handsets In Q3

n Almost 50% of Q3 Unit Shipments Had Integrated Cameras

n Surpassed 500,000 Open System, JAVA Linux-Based Handset Shipments YTD

n Enhanced CDMA Capabilities By Purchasing Balance of Appeal Telecom in Korea


Semiconductor Products SegmentFreescale Semiconductor, Inc.

11.9 ppts(6.2%)5.7%Operating Margin

Profit vs. Loss($76)$82Operating Earnings (Loss) $M

17%$1,225$1,430Sales $M

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Q3’04/Q3’03

Q3

2003

Q3

2004

• Freescale’s Q3 Earnings Conference Call Scheduled For 5:15 CST Today


Global Telecom Solutions Segment



24%$1,054$1,308Sales $M

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Q3’04/Q3’03

Q3

2003

Q3

2004

•• Sales Growth Occurred in All Technologies and All Regions, Exceptionally Strong in North America and Asia

• Believe We Grew Market Share

• Operating Earnings Increase Due to Sales Growth and Improved Gross Margin


n Began Deployment of the World’s Largest Wireless SoftSwitch Contract With Launches in 6 Major Brazilian Cities.

n Continued Industry Leading Push-To-Talk Over Cellular Momentum With 18 Contracts To Date in 23 Countries.

n Awarded Contract to Deploy KDDI’s First Nationwide 2.1 GHz CDMA2000 1X Network in Japan

n New EDGE Contracts Announced

Q3’04 GTSS – Other Developments


Commercial Govt. and Industrial Solutions Segment

§ Sales Growth Reflects Continued Strength For Homeland Security Communications and Business Critical Communications For Enterprise Customers.§ Operating Earnings Improvement Due to Higher Sales, a Favorable Product Mix vs. Last Year, and Supply Chain Efficiencies



12%$1,035$1,164Sales $M

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Q3’04/Q3’03

Q3

2003

Q3

2004


Q3’04 CGISS – Other Developments

• Commonwealth of Virginia Awarded Motorola $329M Multi-Year Contract

• State of Arkansas Expanded Its Existing Statewide Network Contract

• The Netherlands Awarded Motorola a Contract For More Than 20,000 TETRA Radios


Integrated Electronic Systems Segment

(1.9 ppts)4.5%2.6%Operating Margin

(28%)$25$18Operating Earnings $M

22%$559$683Sales $M

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Q3’04/Q3’03

Q3

2003

Q3

2004

•• Sales Growth Led By Automotive Electronics

• Operating Earnings Lower Due In Part To Expenses Associated With the Force Computer Acquisition

• We Expect A Significant Sequential Improvement in Operating Earnings in Q4


Q3’04 IESS – Other Developments

n Automotive Electronics Awarded $700M In New And Replacement Multi-Year Contracts.

n Completed the Acquisition of Force Computers.


Broadband Communications Segment

6.7 ppts(0.9%)5.8%Operating Margin

Profit vs. Loss($4)$34Operating Earnings (Loss) $M

31%$451$589Sales $M

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Q3’04/Q3’03

Q3

2003

Q3

2004

•• Fourth Consecutive Quarter of Year Over Year Sales Growth

• Earnings Growth Driven By Higher Sales


Q3’04 BCS – Other Developments

n Shipped Approx. 400K HD Set-Tops With Almost 200K Being HD-DVR Devices

n Selected By Comcast To Provide VoIP Services in Select Markets

n Motorola’s Partner (DVN) Signed a Contract To Provide Broadband Solutions in Western China

n Record Quarter For Cable Modem Units Shipped


Corporate Initiatives – Digital Six Sigman Proven Methodology to Improve Business Performance

– Profitability, Quality, and Customer Satisfaction

n Leverage Proven Tools to Achieve Rapid Results

n Drives Accountability…Aligns With Customers

n Focuses Organization on Vital Few

2003-2005 Results to Date

Initial “Vital Few” Opportunity 2003 Act YTD ‘04

Engineering Leverage ~ $1.1B ($ 93M) $ 1,183M

Cost of Poor Quality ~ $0.9B $ 513M $ 207M

Procurement Effectiveness ~ $1.0B $ 328M $ 582M

~ $3.0B $ 748M $ 1,972M

* Versus 2002 BaselineCumulative Savings of $2.7B


Q4 Guidance By Segment (2004 vs. 2003)

~16%-20%Motorola

20%-25%Broadband Communications

10%-15%Integrated Electronics Systems

Flat vs. Strong Q4’03Commercial, Gov’t, Industrial Solutions

5%-10%Global Telecom Solutions

FSL To ProvideFreescale Semiconductor

35%-40%Personal Communications

Sales Growth


Chief Executive OfficerChairman of the Board of Directors

Ed Ed ZanderZander

Motorola Q&A Participants

Mike ZafirovskiMike Zafirovski

Ed GamsEd Gams

President Chief Operating Officer

Senior Vice PresidentDirector of Investor Relations

David DevonshireDavid DevonshireExecutive Vice President

Chief Financial Officer


Use of Non-GAAP MeasurementsIn addition to the GAAP results provided during this conference call, non-GAAP measurements,

which present operating earnings on a basis excluding charges relating to the separation of FreescaleSemiconductor, Inc, goodwill impairment, and severance charges have been provided.

Motorola has provided these non-GAAP measurements as a measure to help investors better understand its core operating performance, enhance comparisons of Motorola’s core operating performance from period to period and to allow better comparisons of Motorola’s operating performance to that of its competitors. Among other things, the Company’s management uses these operating results, excluding the identified items, to evaluate the performance of its businesses and to evaluate results relative to incentive compensation targets. Management uses operating results excluding these items because they believe this measure enables them to make better period-to-period evaluations of the financial performance of its core business operations. There are inherent limitations in the use of operating results excluding these items because the company's GAAP results do include the impact of these items. The non-GAAP measures are intended only as a supplement to the comparable GAAP measures and the company compensates for the limitations inherent in the use of non-GAAP measures by using GAAP measures in conjunction with the non-GAAP measures. As a result, investors should consider these non-GAAP measures in addition to, and not in substitution for, or as superior to, measures of financial performance prepared in accordance with GAAP.

Details of the these items and reconciliations of the non-GAAP measurements provided during this call to GAAP measurements can be found: (i) in the Form 8-K filed by Motorola on October 19, 2004 (which attached this afternoon’s earnings press release, and (ii) within the text of the slides that accompany this webcast. Each of these items can be found on Motorola’s website at www.motorola.com/investor


Safe Harbor StatementDuring 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) expectations for Motorola sales and earnings per share for Q4 2004; (2) expectations for sales, profitability, operating earnings, operating margin and market share for each of Motorola’s segments; (3) the timing, sales impact and pricing of new products; (4) potential benefits from Motorola’s process optimization activities; (5) Motorola’s ability to successfully distribute its remaining ownership of FSL in a timely manner and (6) the impact of the distribution of the remaining interest in FSL and Motorola’s future plans with respect to its other businesses..

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 afternoon's press release, on pages 76 through 85 in Motorola’s 2003 Annual Report on Form 10-K.


Corporate Initiatives Status Report

6.8%

45.1%

Q3 YTD

2003

$1,972M$748MTotal Improvement

$582M$328MProcurement Effectiveness

$ 207M6.0%$513M6.7%8.4%COPQ as a % NSAD

$1,183M32.2%($ 93M)41.9%41.1%R&D as a % Gross Margin

$ Fav

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Q3 YTD

2004

$ Fav

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Annual

2003

Annual

2002

2003 vs. 2002 Baseline YTD’04 vs. YTD’03


Vital Few – Opportunity

Engineering Leverage(R&D$ % of Gross Margin $)

Cost of Poor Quality(% of Sales)

Procurement Effectiveness

Base:Actual2002

Goal:End of2005

Improvement Opportunity

41.1%

8.4%

Baseline

30.0% ~ $1.1B

5.4% ~ $0.9B

~ $1.0B

Totals ~ $3.0B


9.9%$ 855 9.8%$ 855 4.4%$ 302

4 18 10 Other Charges

(19)(41)-Freescale Separation Charges

(55)13 (49)Severance

(67)--Goodwill Impairment

8.3%$ 718 9.7%$ 845 3.9%$ 263 GAAP Operating Earnings

% of Sales$% of Sales$% of Sales$

Q3 '04Q2 '04Q3 '03

Reconciliation of Non-GAAP Measurements

Economy & Finance

Q3 2004 Motorola Inc. Earnings Conference Call Presentation