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Set-Top Switch Could Soften Moto's 2H

Cable operators are taking the brunt of the Federal Communications Commission (FCC) ban on set-tops with integrated security, but Motorola Inc. (NYSE: MOT) margins may take a whack as well.

"As we anticipated, the second half will be softer than the first half due to the FCC mandate," said Motorola president and COO Greg Brown, in a call with investors Thursday. "Operating margin will be down a bit, but we still expect it to improve for the full year." (See Moto: Hello Zero.)

Brown later elaborated a "best guess" that about $150 million in revenues would be pulled from the second half of fiscal 2007 due to the regulatory mandates, which, barring special waivers, require that TV service operators move to separable security set-tops as of July 1, 2007. (See Countdown to 'Seven-Oh-Seven' and Boxing Up 'Seven-Oh-Seven' .)

Just as during its fiscal first quarter, Motorola's Connected Home division was the company's bright spot, as the unit posted second-quarter sales of $1.1 billion, up 40 percent year-over-year, and up 8 percent from the previous period.

Motorola attributed the sales boost to strong demand for its HD-DVR and IPTV set-tops and other "digital cable host" gear. The company shipped 4.2 million units in the period, of which 30 percent were HD-DVRs and 15 percent were IPTV boxes. But total volume was down by $700,000 due to accelerated purchases of "low-end" set-tops ahead of the FCC mandate.

One item not addressed on the call was the potential competitive impact of a big Verizon Communications Inc. (NYSE: VZ) request for proposal (RFP) for a "next-generation" set-top and conditional access system. Motorola remains Verizon's sole supplier for the telco's FiOS TV service, but that could change in the months ahead. (See Verizon Set-Top RFP Could Be Worth Billions .)

Brown, however, said Motorola is seeing solid demand from cable, as well as customers like Verizon and AT&T Inc. (NYSE: T), "as they ramp up their respective video businesses."

The company also reported shipments of 2.9 million units of voice and data modems, up 11 percent from a year ago. Reflecting operator growth of VOIP services, 40 percent of those units were of the voice gateway variety.

Motorola also confirmed some significant changes to its corporate structure. It has combined the Connected Home Solutions unit with the Cellular Wireless Networks business. Dan Moloney, the former chief of Connected Home, will head up the newly combined unit, now called Home and Networks Mobility, which tallied sales of $2.6 billion in the quarter, up 9 percent year-over-year.

Ed Zander, Motorola's chairman and CEO, hinted that the company may also be in the market for some "small acquisitions" in the IP and technology arena, in the wake of recent deals for Modulus Video Inc. and those still pending for Leapstone Systems Inc. and Terayon Communication Systems Inc. . (See Motorola Jumps on Leapstone, Motorola to Buy Modulus, and Motorola to Buy Terayon for $140M.)

One possible target is RGB Networks Inc. , already the beneficiary of a reseller relationship with Motorola. However, RGB chairman and CEO Jef Graham stressed earlier this year that the digital video specialist is not for sale, and that the company could tee up an initial public offering in spring 2008. (See RGB: Ripe for Aquisition? )

— Jeff Baumgartner, Site Editor, Cable Digital News

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