Motorola 2006 Annual Report Download - page 64

56 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Segment Information
The following commentary should be read in conjunction with the financial results of each reporting segment
as detailed in Note 11, ""Information by Segment and Geographic Region,'' to the Company's consolidated financial
statements. Net sales and operating results for the Company's three operating segments for 2006, 2005 and 2004 are
presented below.
Mobile Devices Segment
The Mobile Devices segment designs, manufactures, sells and services wireless handsets with integrated
software and accessory products, and licenses intellectual property. In 2006, the segment's net sales represented 66%
of the Company's consolidated net sales, compared to 61% in 2005 and 58% in 2004.
Years Ended December 31 Percent Change
(Dollars in millions) 2006 2005 2004 2006Ì2005 2005Ì2004
Segment net sales $28,383 $21,459 $17,108 32% 25%
Operating earnings 2,690 2,192 1,728 23% 27%
Segment ResultsÌ2006 Compared to 2005
In 2006, the segment's net sales increased 32% to $28.4 billion, compared to $21.5 billion in 2005. The
increase in net sales was driven by a 49% increase in unit shipments, primarily driven by strong demand for GSM
and CDMA handsets and reflecting consumers' desire for the segment's compelling products that combine
innovative style and leading technology, partially offset by an 11% decrease in average selling price (""ASP''). On a
product technology basis, net sales of products for GSM and CDMA technologies increased and net sales of
products for iDEN and UMTS technologies decreased. On a geographic basis, net sales increased in High Growth
markets (defined as countries in the Middle East, Africa, Southeast Asia and India), North Asia, North America
and Latin America, and decreased in Europe.
The segment's operating earnings increased to $2.7 billion in 2006, compared to operating earnings of
$2.2 billion in 2005. The 23% increase in operating earnings was primarily due to an increase in gross margin,
driven primarily by: (i) the 49% increase in unit shipments, (ii) savings from supply chain cost-reduction initiatives,
and (iii) increased income from technology and platform licensing, partially offset by the 11% decline in ASP. The
increase in gross margin was partially offset by: (i) an increase in selling, general and administrative (""SG&A'')
expenses, primarily driven by an increase in marketing expenses to support higher net sales and promote brand
awareness, and (ii) an increase in research and development (""R&D'') expenditures, as a result of an increase in
developmental engineering for new product development and software, as well as ongoing investment in next-
generation technologies. The segment's industry typically experiences short life cycles for new products, so it is vital
to the segment's success that new, compelling products are constantly introduced. Therefore, a strong commitment
to R&D is required to fuel long-term growth. As a percentage of net sales, SG&A expenses increased and R&D
expenditures decreased as compared to 2005.
The segment's backlog was $1.4 billion at December 31, 2006, compared to $3.0 billion at December 31,
2005. This decrease in backlog is primarily due to an unusually high level of backlog at December 31, 2005 due to
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.
Unit shipments increased 49% to 217.4 million units in 2006, compared to 146.0 million units in 2005. The
overall increase was driven by increased unit shipments of products for GSM, CDMA and UMTS technologies,
partially offset by decreased unit shipments of products for iDEN technology. For the full year 2006, 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 20% in 2006, the segment believes that it
expanded its global handset market share to an estimated 22% in 2006.
In 2006, ASP decreased approximately 11% compared to 2005. The overall decrease in ASP was driven
primarily by an unfavorable geographic and product-tier mix. By comparison, ASP decreased approximately 10% in
2005 and increased approximately 15% in 2004. ASP is impacted by numerous factors, including product mix,
market conditions and competitive product offerings, and ASP trends often vary over time.