Motorola 2006 Annual Report Download - page 65

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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The largest of the segment's end customers (including sales through distributors) are China Mobile, Verizon,
Sprint Nextel, Cingular, and T-Mobile. These five largest customers accounted for approximately 39% of the
segment's net sales in 2006. Besides selling directly to carriers and operators, the segment also sells products
through a variety of third-party distributors and retailers, which account for approximately 38% of the segment's
net sales. The largest of these distributors is Brightstar Corporation. The loss of any of the segment's key customers
could have a significant impact on the segment's business.
Although the U.S. market continued to be the segment's largest individual market, many of our customers, and
more than 65% of our segment's 2006 net sales, were outside the U.S. The largest of these international markets are
China, Brazil, the United Kingdom, Mexico, and Hong Kong.
During 2006, the segment completed the acquisition of TTP Communications plc, a developer of intellectual
property used in the design and manufacture of wireless communication terminals and a leading provider of
protocol stack software that offers rapid customization of handsets through its AJAR applications framework.
Subsequent to the end of 2006, the segment completed the acquisition of Good Technology, Inc., a leader in
enterprise mobile computing software and service.
Segment ResultsÌ2005 Compared to 2004
In 2005, the segment's net sales increased 25% to $21.5 billion, compared to $17.1 billion in 2004. The
increase in net sales was driven by a 40% increase in unit shipments in 2005, reflecting strong consumer demand for
GSM handsets. The segment had increased net sales in all regions as a result of an improved product portfolio,
strong market growth in emerging markets and high replacement sales in more mature markets.
The segment's operating earnings increased to $2.2 billion in 2005, compared to operating earnings of
$1.7 billion in 2004. The 27% increase in operating earnings was primarily related to an increase in gross margin,
driven by the 25% increase in net sales. The improvement in gross margin was partially offset by: (i) an increase in
SG&A expenses, primarily driven by increased marketing expenses to support higher net sales and brand awareness,
and (ii) an increase in R&D expenditures, as a result of increased investment in new product development. As a
percentage of net sales, both R&D expenditures and SG&A expenses decreased in 2005 as compared to 2004.
The segment's backlog was $3.0 billion at December 31, 2005, compared to $1.5 billion at December 31,
2004. During 2005, the segment had strong order growth and backlog increased due to: (i) strong customer
demand for new products during the fourth quarter of 2005, certain of which were unable to be shipped in
significant quantities due to supply constraints for select components, and (ii) the segment's higher level of general
order input in the fourth quarter of 2005 compared to the fourth quarter of 2004.
Unit shipments increased 40% to 146.0 million in 2005, compared to 104.5 million in 2004. The increase in
unit shipments was attributed to broad acceptance of the segment's product offering, particularly a strong demand
for GSM handsets. For the full year 2005, unit shipments by the segment increased in all regions. Due to the
segment's increase in unit shipments outpacing overall growth in the worldwide handset market, which grew
approximately 17% in 2005, the segment believes that it expanded its global market share to an estimated 18% in
2005.
In 2005, ASP decreased approximately 10% compared to 2004. The overall decrease in ASP was driven
primarily by a higher percentage of lower-tier, lower-priced handsets in the overall sales mix. By comparison, ASP
increased approximately 15% in 2004 and declined approximately 8% in 2003.
The largest of the segment's end customers (including sales through distributors) were Sprint Nextel, Cingular,
China Mobile, Amπerica M πovil and T-Mobile. These five largest customers accounted for approximately 41% of the
segment's net sales in 2005. During 2005, purchases of iDEN» products by Sprint Nextel comprised approximately
13% of the segment's net sales. Besides selling directly to carriers and operators, the segment also sells products
through a variety of third-party distributors and retailers, which account for approximately 36% of the segment's
net sales. The largest of these distributors was Brightstar Corporation.
Although the U.S. market continued to be the segment's largest individual market, many of our customers, and
more than 63% of our segment's 2005 net sales, were outside the U.S. The largest of these international markets
were China, the United Kingdom, Brazil, Germany and Mexico.