Motorola Sharpens the Razr Edge

With cool designs and faster production, it's gaining ground in the handset market, but will the good news be more than a blip?

By Roger O. Crockett

Not since Motorola (MOT ) released the StarTac, the black flip-phone that sent shudders of fear through the cellular industry in 1996, has the Schaumburg (Ill.) communications company been this hot. The industry's killer handset of the moment: Motorola's ultra-sleek Razr V3.

For two years, top designers labored in secret to develop a credit-card-size phone packed with all the current doodads -- camera, video playback, and MP3 player. When CEO Edward J. Zander got his first peek last spring, he recalls thinking: "This is an iconic product." He pushed his crew to make as many as possible.

WORRIED INVESTORS.

  Now the industry is paying attention once again. Since the Razr V3 hit store shelves in November, Motorola has shipped an estimated 750,000 of the $500 phones -- three times more than Zander initially expected. And BusinessWeek has learned that the company is hard at work on a whole family of Razr-like phones in various shapes and colors -- including the Sliver, a candy-bar-shaped Razr -- to be announced later this year.

The Razr, part of what JPMorgan Chase & Co. analyst Ehud Gelblum calls "the company's best lineup of phones in recent history," helped Motorola sail to its strongest quarter since Zander took over from former CEO Christopher B. Galvin a year ago. The company posted $654 million in earnings on record sales of $8.8 billion in the fourth quarter -- a 27% jump over the previous year's sales. For the full year, Motorola earned $1.5 billion on $31.3 billion in revenue. Says Zander: "We showed what Motorola innovation was all about."

Can Motorola keep it up? Despite the good news, shares tumbled 7%, to $16.20, the day after the announcement. Clearly worried that Motorola might slip into its old habit of up and down performance, investors were reacting to a possible plateau in profit margins and soft guidance for the first quarter: 17 cents to 20 cents a share, below Wall Street's 20 cents consensus.

SLUGGISH NO LONGER.

  The pessimism may be too strong, though: Over the last four quarters, Motorola has beaten analysts' estimates. Moreover, with the stock still up 25% since Zander took the helm, many may simply be taking profits. Says Zander: "I don't know how many quarters until we're out of the penalty box."

He'll likely get his answer by midyear, when a host of new "wow" products will show whether Motorola can sustain its momentum. By then it plans to release several more phones, including the E815, which plays TV-quality video, and the MPX, a smart phone with a clamshell design.

The key to continued strength? This is no longer the old, sluggish Motorola. Zander has intensified efforts to overhaul the supply chain. Factories now do a better job estimating customer orders and delivering product on time. Better yet, Motorola has finally created the common chassis and parts that enable it to make different phones quickly. That's a big reason why it delivered 20 new models in the fourth quarter and bumped up its market share from 13.5% to 16.6%, reclaiming the No.2 spot from Samsung.

STAYING POWER?

  Still, Zander faces plenty of challenges. Motorola badly needs to start selling more phones to Verizon Wireless and Sprint. The market for CDMA phones, which both carriers use, could grow as much as three times faster than the overall phone market, according to Standard & Poor's analyst Kenneth M. Leon, as carriers roll out speedy new networks. These require sophisticated CDMA phones, which haven't been Motorola's strong suit. But its release of several basic CDMA models suggest it's making progress.

Boosting margins will also be critical. Nokia reports phone operating margins in the high teens, vs. Motorola's 10.5%. Zander says shared platforms and a focus on avoiding inventory backlogs will help.

Zander has put Motorola back on solid ground. Now he needs more hits such as the Razr to prove this turnaround has staying power.

Crockett is deputy manager in BusinessWeek's Chicago bureau

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