Motorola 2008 Annual Report Download - page 72

primarily due to higher net sales in the home business. The increase in net sales in Asia was primarily driven by
higher net sales of UMTS and CDMA infrastructure equipment, partially offset by lower net sales of GSM
infrastructure. The decrease in net sales in North America was primarily due to lower net sales of iDEN and CDMA
infrastructure equipment, partially offset by higher net sales in the home business. Net sales in North America
accounted for approximately 50% of the segment’s total net sales in 2008, compared to approximately 52% of the
segment’s total net sales in 2007. The regional shift in 2008 as compared to 2007 reflects a 5% aggregate growth in
net sales outside of North America and a 3% decline in net sales in North America.
The segment had operating earnings of $918 million in 2008, compared to operating earnings of $709 million
in 2007. The increase in operating earnings was primarily due to: (i) decreases in both SG&A and R&D
expenditures, primarily related to savings from cost-reduction initiatives, and (ii) a decrease in reorganization of
business charges, relating primarily to lower employee severance costs. These factors were partially offset by a
decrease in gross margin, primarily due to: (i) an unfavorable product mix, and (ii) the absence of net sales by
ECC. As a percentage of net sales in 2008 as compared to 2007, gross margin, SG&A expenses and R&D
expenditures all decreased and operating margin increased. The segment’s gross margin percentages differ among
its services, software and equipment products. Accordingly, the aggregate gross margin of the segment can
fluctuate from period to period depending upon the relative mix of sales in the given period.
Due to the nature of the segment’s business, many of the agreements we enter into are long-term contracts
that require sizeable investments by our customers. The segment is dependent upon a small number of customers
for a significant portion of its sales. In 2008, sales to the segment’s top five customers represented approximately
45% of the segment’s net sales. The loss of one of these major customers could have a significant impact on the
segment’s business and, because many of these contracts are long-term in nature, could impact revenue and
earnings over several quarters. The segment’s backlog was $2.3 billion at December 31, 2008, compared to
$2.6 billion at December 31, 2007.
In the home business, demand for the segment’s products depends primarily on the level of capital spending by
broadband operators for constructing, rebuilding or upgrading their communications systems, and for offering
advanced services. Additionally, in 2008, our digital video customers significantly increased their purchases of the
segment’s products and services, primarily due to increased demand for digital entertainment devices, particularly
IP and HD/DVR devices.
In the networks business, the segment has been a long-standing proponent of WiMAX and is now
commercially deploying this technology to multiple customers on a global basis. The segment is developing
infrastructure equipment utilizing LTE technology. LTE has widespread industry support, not only from current
GSM/UMTS operators, but also from CDMA/EV-DO based carriers.
In February 2008, the segment acquired the assets related to digital cable set-top products of Zhejiang Dahua
Digital Technology Co., LTD and Hangzhou Image Silicon, (known collectively as Dahua Digital), a developer,
manufacturer and marketer of cable set-tops and related low cost integrated circuits for the emerging Chinese cable
business. The acquisition helps the segment strengthen its position in the rapidly growing cable market in China.
Segment Results—2007 Compared to 2006
In 2007, the segment’s net sales increased 9% to $10.0 billion, compared to $9.2 billion in 2006. The 9%
increase in net sales reflects a 27% increase in net sales in the home business, partially offset by a 1% decrease in
net sales in the network business. The 27% increase in net sales in the home business was primarily driven by: (i) a
43% increase in net sales of digital entertainment devices, reflecting a 50% increase in unit shipments to
15.1 million units, partially offset by a decline in ASP due to a product mix shift towards all-digital set-tops, and
(ii) a 6% increase in net sales of broadband gateways, primarily due to higher net sales of data modems, driven by
net sales from the Netopia, Inc. business acquired in February 2007. The 1% decrease in net sales in the networks
business was primarily driven by lower net sales of iDEN and CDMA infrastructure equipment, partially offset by
higher net sales of GSM infrastructure equipment, despite competitive pricing pressure.
On a geographic basis, the 9% increase in net sales reflects higher net sales in all geographic regions. The
increase in net sales in North America was driven primarily by higher sales of digital entertainment devices,
partially offset by lower net sales of iDEN and CDMA infrastructure equipment. The increase in net sales in Asia
was primarily due to higher net sales of GSM infrastructure equipment, partially offset by lower net sales of
CDMA infrastructure equipment. The increase in net sales in EMEA was primarily due to higher net sales of GSM
infrastructure equipment, partially offset by lower demand for iDEN and CDMA infrastructure equipment. Net
sales in North America continued to comprise a significant portion of the segment’s business, accounting for 52%
of the segment’s total net sales in 2007, compared to 56% of the segment’s total net sales in 2006.
64 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS