January 3, 2011

Canal Street, Suite 1101Chicago, IL 60606

Motorola Inc. / (MOT: NYSE) / $8.21*

Note: This report contains substantially new material. Subsequent reports will havenew or revised material highlighted.

Reason for Report: 3Q10 Earnings Update With New Reports

Prev. Ed.: August 30, 2010; 2Q10 Earnings Update with New Reports (brokers’ material considered till July 30, 2010)

Brokers’ Recommendations: Positive: 55.6% (15 firms); Neutral: 37.0% (10); Negative: 7.4% (2) Prev. Ed.: 13; 8, 1

Brokers’ Target Price: $9.36 (↑ $0.54 from the last edition; 20 firms) Brokers’ Avg. Expected Return: 14.0%

*Note: Although dated January 3, 2011, share price and brokers’ material are as of November 9, 2010.

Note: A Flash Update was done on October 29, 2010 on 3Q10 Earnings Update.

Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers’ than in the Valuation table.

Portfolio Manager Executive Summary

Motorola Inc. (MOT or the Company) is a leading manufacturer of wireless phones and accessories. The Company has three operating segments: Mobile Devices, which designs and manufactures wireless phones; Home and Networks Mobility, whichprovides a variety of communications and video equipment to cable and satellite television providers and wireless and wireline carriers; and Enterprise Mobility Solutions, which provides communication systems to enterprise customers and the public sector.

Key factors for determining an investment strategy for MOT are as follows:

  • MOT is taking a series of positive steps (move to QCOM silicon, consolidating software platforms, spinout with new leadership, etc.) to improve the unit for the long term.
  • Motorola is fully embracing a Symbian/UIQ solution on its mid-to-high tier.

Competition: Motorola's portfolio continues to lag the competition even though its pace of new introductions has improved. Motorola is particularly weak in 3G WCDMA, smart phones, and the low end. Motorola's regional focus (the Americas and China) also puts it against strong competition (RIMM and Apple in smart phones, Samsung and LG in the mid/high tier handset market, and the aggressive domestic Chinese vendors), which could put more pressure on margins and ASP (Average Selling Price).

Analysts’ opinions: Of the brokerage firms in the Digest group providing ratings on the stock, 55.6% provided positive ratings, 37.0%assignedneutral ratings;while only 7.4%took a negative stance. The expected return on the current share price, provided by the firms, is 14.0%. The target prices range from a low of $6.50 to a high of $11.00, with an average target price of $9.36. Most of the firms have valued the stock based on a P/E multiple, EV/sales, and sum-of-parts analysis methods.

Bullish (Buy or equivalent outlook) – 15firms or 55.6%: Target prices range from $9.88 to $11.00. These firms are positive on MOT, given its attractive valuation, continued revenue growth, relative stability in several key end markets; new program wins for the overall business, and margin improvements from restructuring. The firms believe Motorola still has ample undervalued assets from tangible to intangible property, andit is still a well-regarded brand. Despite the poor near-term outlook and financials, they think that on a longer-term basis, the Company offers meaningful valuation upside.

Cautious (Neutral or equivalent outlook) – 10 firms or 37.0%: Target prices range from $7.50 to $10.00. The firms believe MOT continues to be challenged with its struggling mobile handset business and significant market share loss of units sold on a worldwide basis. They believe that the Company’s business growth prospects may take longer to proliferate than previously expected. Recent recessionary conditions and the possibility of higher input costs may further impede any form of financial improvement.

Bearish (Sell or equivalent outlook) – 2 firms or 7.4%: Target prices range from $6.50 to $7.40. The firms believe that Motorola’s turnaround will take longer than expected and competition will be more brutal in the key segments responsible for its comeback.

General long-term outlook on MOT: Despite some near-term concerns, MOT’s long-term growth outlook is positive, given its significant revenue growth due to further outsourcing opportunities and the ramp of new business. The firms expect the total revenue to increase at a 3-year (2009–2012) CAGR of 7.2%, net income to increase at a 3-year (2009–2012) CAGR of 134.6% andoperatingcash flow to increase at a (2008–2011) CAGR of 83.6%. The average expected long-term growth is 7.4%. Finally, the firms believe thatMOT’s strong operating structure gives it an edge in winning deals, from both new and existing customers.

January 3, 2011

Overview

According to the brokerage firms, the following are the major issues to consider when assessing this stock:

Key Positive Arguments / Key Negative Arguments
  • Competitive Position: Leading supplier of digital wireless products: intellectual property, chipsets, and network infrastructure components. Dominant position in CDMA market.
  • Compelling Fundamentals: Bestpositioned to benefit from accelerated 3G adoption, with unparalleled combination of IPR and chip businesses. MOT has no debt and continues with its share repurchase program.
  • Growth: Strong pickup in developing and emerging markets. Strong growth forecast for the worldwide mobile device market, driven by new subscriber growth and increased transition to W-CDMA. Heavy R&D spending continues to drive the patent portfolio.
/
  • Competition: Competitors such asNokia, TexasInstruments are entering the CDMA semiconductor market. Competing standards and technologies such as WiBro/WiMax, DVB-H, or the China TD-SCDMA are potential challenges to MOT’s position.
  • Handset Market Position: Weak wireless handset market with delayed adoption of new technologies, such as W-CDMA, 1xEV-DO, and OFDMA. Increased CDMA handset sales in emerging markets could pressure ASPs and chipset margins. Low-end pricing and cyclical pressures.
  • Increasing Litigation Risks: Legal issues with Nokia and Broadcom are major concerns for the stock.

Illinois-based MotorolaInc. (MOT or the Company) is a global provider of wireless, broadband, automotive communicationtechnologies, and embedded electronic products. It provides software-enhanced wireless telephone and messaging, two-way radio products and systems, and networking and Internet-access products for consumers, network operators, and commercial, government, and industrial customers. MOT also provides end-to-end systems for the delivery of interactive digital video, voice, and high-speed data solutions for broadband operators, and embedded semiconductor solutions for customers in wireless communications, networking and transportation markets. In addition, MOT offers integrated electronic systems for the automotive, telematics, industrial, telecommunications, computing, and portable energy systems markets. It operates in three segments: Mobile Devices, Home and Networks Mobility, and Enterprise Mobility Solutions. Its website is

Note:MOT’s fiscal year ends on December 31.

January 3, 2011

Long-Term Growth

Long-term EPS growth rates for MOT were provided by seven firms. The estimates range from 0.0% to 15.0%. The Digest average long-term EPS growth rate is 7.4%.

MOT expects to enhance its portfolio with a wide range of innovative and low-cost devices. However, Motorola’s main focus is on developing new software and silicon. On the silicon front, Motorola reached an agreement with Qualcomm to use its chipsets on the UMTS handset portfolio. TI and FreeScale will also be the key suppliers of chipsets for UMTS and GSM devices. The development or in-sourcing of more efficient chipsets will lower costs and improve the Company’s profitability.

The analysts also acknowledge the concerted effort made by MOT in establishing a presence in the emerging markets, which they believe positions the Company well to capitalize on the expected ramp in replacement volumes in these regions over the next two years.

The Company’s primary competitors in wireless handsets include large multinational corporations, such as Nokia, Samsung, Siemens, and Sony-Ericsson. Some firms have drawn attention to the competition that MOT mobile phones could face in the near future from Samsung’s new slim-phone business and the growing demand for Sony-Ericsson’s Walkman music phones.

Based on Motorola’s presentations, the analysts believe that the Company’s longer-term plan for fixing the handset division is to create software and hardware platforms that can be used to create various individual models of handsets for markets, carriers and geographic regions. This will allow the Company to reduce R&D spending for its core products and focus more on features. Motorola currently supports over five different operating systems in its handset business and only needs one or two more, according to the analysts. Additionally, on the semiconductor side, Motorola has made mistakes by signing only single-source suppliers. The core problem of the entire handset business is that it relies solely on hits instead of processes. According to the analysts, having a business based on hits, be it in movies, music, or consumer electronics, will inevitably lead to severe volatility in financial results.

January 3, 2011

Target Price/Valuation

Provided below is a summary of valuations and ratings as compiled by Zacks Research Digest:

Rating Distribution
Positive / 55.6%↓
Neutral / 37.0%↑
Negative / 7.4%↑
Maximum Target Price / $11.00↑
Minimum Target Price / $6.50↑
Avg. Target Price / $9.36↑
No. of Analysts giving target price/Total / 20/27

Risks that could impede Motorola shares from reaching the price objective include but are not limited to the following:

  1. Slowing growth of handset shipments worldwide
  2. Potential acquisitions that may be dilutive in the near term until cost synergies can be fully exploited
  3. Inability to gain market share and improve margins
  4. Rising competition and pricing pressures
  5. Lackluster performance of global handset and wireless infrastructure markets
  6. Problems that could result from Qualcomm’s ban on handset shipment

Recent Events

On October 28, 2010, MOT announced its 3Q10 financial results. As reported, total revenue was $5.8 billion, up 6% y/y. The Zacks average estimate for 3Q10 revenue was $5.6 billion. GAAP net income was $109 million, or $0.05 per share versus $12 million or $0.01 per share, in 3Q09. The Zacks average estimate was $259.8 million or $0.11 per share. On a non-GAAP basis, including discontinued operations; net income was $380 millionor $0.16 per share versus $131 million or $0.06 per share in 3Q09. The Zacks Digest average estimate was $177.4 million or $0.08 per share.

Revenue

Provided below is a summary of total revenue as compiled by Zacks Research Digest:

Revenue ($M) / 3Q09A / 2Q10A / 3Q10A / 4Q10E / 2009A / 2010E / 2011E / 2012E
Zacks Consensus
Digest High / $4,336.0 / $4,534.0 / $4,890.0 / $5,714.2↓ / $18,147.0 / $21,000.0↓ / $22,066.0↓ / $24,014.0↓
Digest Low / $4,336.0 / $4,534.0 / $4,890.0 / $4,990.0↓ / $18,147.0 / $18,532.0↓ / $19,741.0↑ / $21,014.0↑
Digest Average / $4,336.0 / $4,534.0 / $4,890.0 / $5,430.1↓ / $18,147.0 / $19,736.7↓ / $20,799.2↓ / $22,367.8↓
Y/Y Growth / -42.0% / -0.4% / 12.8% / 13.5% / -39.8% / 8.8% / 5.4% / 7.5%
Q/QGrowth / -4.8% / 8.1% / 7.9% / 11.0%

According to the Digest model, total revenue in 3Q10 was $4,890.0million;up12.8% y/yand7.9% q/q. Financial results related to the portion of the Company’s Networks businesswhich is expected to be acquired by Nokia Siemens Networks (“NSN”) are reported as discontinued operations. Sales, including $871 million associated with discontinued operations, totaled $5.8 billion, up 6% y/y.

Provided below is a summary of segmental revenue as compiled by Zacks Research Digest:

Revenue ($M) / 3Q09A / 2Q10A / 3Q10A / 4Q10E / 2009A / 2010E / 2011E / 2012E
Mobile Devices / $1,692.4 / $1,724.0 / $2,034.0 / $2,364.2↑ / $7,145.9 / $7,763.2↑ / $8,666.6↓ / $10,430.0↑
Home and Networks Mobility / $866.0 / $886.0 / $912.0 / $989.0↓ / $3,904.3 / $3,625.0↓ / $3,698.6↓ / $3,731.0↓
Enterprise Mobility / $1,793.0 / $1,931.0 / $1,946.0 / $2,119.8↑ / $7,168.8 / $7,708.2↓ / $8,088.4↑ / $8,890.0↑
Other Products / ($15.3) / ($7.0) / ($2.0) / ($7.0) ↓ / ($72.0) / ($38.2) ↓ / ($45.2) ↓ / ($11.0)
Total Revenue / $4,336.0 / $4,534.0 / $4,890.0 / $5,430.1↓ / $18,147.0 / $19,736.7↓ / $20,799.2↓ / $22,367.8↓

Provided below is a graphical representation of segmental revenue (adjusted for eliminations):

Segment Revenue:

Mobile Devices (41.6% of 3Q10 total revenue): This segment designs, manufactures, and markets wireless equipment,including wireless handsets, personal two-way radio equipment, and related software andaccessories. Mobile Devices sales were $2,034.0million in 3Q10, up20.2% y/y and 18.0% sequentially.

Motorola has also reorganized the internal segmentation of handsets and will focus on devices in four key categories, which are as follows:

1. Mass market devices: Low-end, communication-centric phones with basic feature sets and no/limited multimedia capabilities.

2. Feature phones: Iconic devices that are high-end and feature enabled voice phones.

3. Multimedia devices: Optimized and converged phones that have advanced voice capabilities and one or more "extreme multimedia" experiences.

4. Productivity devices: Devices for consumers and businesses.

Mobile Devices highlights:

  • Shipped 3.8 million smartphones with a total of 22 smartphones introduced during 2010.
  • Launched three new smartphones in the iconic MING® series designed for China – the MT810 for China Mobile’s TD-SCDMA network, the XT806 for China Telecom’s CDMA-2000 network, and the A1680 for China Unicom’s WCDMA network.
  • Unveiled the slim and pocketable Motorola DEFY™, optimized for an active lifestyle, water resistant, dust proof and equipped with a 3.7-inch high-resolution, scratch-resistant display.
  • Continued to grow the DROID™ portfolio with the introduction of three new devices, available at Verizon – DROID™ 2, DROID™ PRO, and the limited edition DROID™ R2-D2™.
  • Recently announced three new smartphones available for the holiday season at AT&T: BRAVO™, FLIPSIDE™, and FLIPOUT™, designed for the next generation of smartphone users across all tiers, providing consumers greater choices and flexibility.
  • Continued leadership in Bluetooth™ headset technology with the introduction of four headsets: the Motorola Oasis™, S10-HD, Finiti™, and CommandOne™.

Outlook: For 4Q10, smartphone unit volume, overall unit volume, and total sales are expected to be higher, and for the first time since 4Q06, Mobile Devices will grow its top line on a year-over-year basis. With the sequentially higher unit volume and improved mix, MOT expects a further reduction in operating loss.

For FY10, MOT expects to launch more than 20 smartphones. Smartphone shipment is expected to be in the range of 12 million to 14 million units. Mid-to-high tier feature phones volume is expected to decline sequentially. Through 2H10, MOT expects feature phone unit volume to remain relatively stable. In voice-centric devices, the Company expects to build brand awareness, meet retail channel requirements, and yield modest financial returns.

One firm (SIG) expects Mobile Devices revenue to grow 17% and 20% in CY11 and CY12, respectively, providing management an opportunity to increase its earnings leverage.

Home and Networks Mobility (18.7% of 3Q10 total revenue): Within this segment, the Home division designs, manufactures, and installs digital video, IP video and broadcast network interactive set-top boxes, as well as voice and data related customer premises equipment primarily for the cable TV industry. The Network division provides mobile broadband infrastructure system to the wireless service providers. Home and Networks sales were $912.0million in 3Q10, up5.3% y/yand 2.9% sequentially.

Home and Networks Mobility highlights:

  • Launched the Motorola EDGE™ Service Assurance Software Suite, enabling cable and telecom operators to more efficiently activate provision, maintain, and support all broadband services in a multi-screen digital home.
  • Introduced a hosted switched digital video solution that provides independent operators with the bandwidth reclamation and management capabilities needed to launch HDTV, VOD, 3DTV, and interactive TV applications.
  • Supported Verizon with the launch of its video service by providing the Motorola Medios software suite to ingest content and prepare it for distribution, enabling subscribers to share video among devices such as set-top boxes, personal computers, and smartphones.

Outlook:For the Home segment, Motorola now expects sales for FY10 to decline by approximately 7%, which is at the top end of the prior range provided.

Enterprise Mobility Solutions (EMS)(39.8% of 3Q10 total revenue): This segment develops and services both analog and digital two way radio, voice & data communications products, and systems for private networks, wireless broadband systems and end-to-end enterprise mobility solutions to a wide range of enterprise markets. It also provides customized, fully integrated communication and information systems for mission-critical customers, including government and public safety agencies. Enterprise Mobility Solutions sales were $1,946.0million in 3Q10, up8.5% y/yand 0.8% sequentially.

Enterprise Mobility Solutions highlights:

  • Secured a $50 million federal government grant to expand broadband access to communities in the San Francisco Bay Area, including a private broadband LTE network for public safety.
  • Announced a strategic alliance with Ericsson for an LTE-based solution that will be integrated with Motorola’s Next Generation Public Safety Broadband solution.
  • Introduced the new MC65, a compact, rugged enterprise mobile computer aimed at improving productivity in task-oriented environments such as field service, field sales, transportation and public safety.
  • Began shipping the new ES400 enterprise digital assistant, which will be available globally during the fourth quarter.
  • Received multi-million dollar public safety contracts from the U.S. Marshals Service, Washington Metro Area Transportation Authority and Nashville-Davidson County Metropolitan Government in Tennessee.

Outlook: The Company expects sales to improve sequentially. Motorola expects to achieve mid- single digit percent sales growth in Enterprise Mobility in FY10.

Other Products: Revenue from other products was ($2.0) million in 3Q10.

Outlook

The Company did not provide 4Q10 total revenue guidance.

Most of the firms expect Motorola to launch new devices into 1H11 and believe that the Company’s success will depend on excellent products and proper execution, as well as a recovery in the broader macroenvironment.