The initial question on many minds when news broke last week that Sanjay Jha, COO at Qualcomm Inc., would help lead Motorola Inc. out of the woods: Why swap celebrated success for plying the trackless wilderness?
Last week, Jha himself essentially cited the challenge and paid homage to Motorola’s reputation for engineering prowess.
Others pointed out that Qualcomm is basically a family-owned business and that Jha, as COO at age 45, may have gone as far as possible under CEO Paul Jacobs. Jacobs, also 45, presumably has decades at the helm ahead of him.
At Motorola, Jha has the opportunity to lead. (Jha officially is co-CEO, along with co-CEO Greg Brown, of the entire company and will take charge of the handset division, once Motorola’s bread-and-butter.)
Jha’s point is well-taken by analyst Matt Thornton at Avian Securities L.L.C.
“Sanjay’s caliber speaks to the caliber of the opportunity,” Thornton said.
Oh, and there’s the question of compensation:
The value of Jha’s reward was estimated at up to $94 million, according to the Wall Street Journal. That’s based on $3.6 million in salary and bonuses this year, plus restricted stock and options worth up to $90 million. (The WSJ cited compensation expert David Schmidt at James F. Reda & Associates.)
The WSJ‘s Mean Street columnist, Evan Newmark, calculated that Motorola’s promise to Jha of a 3% equity stake in a spun-off handset division could be worth up to $500 million at some point, and noted that the company would pay him $30 million if it doesn’t fly solo.
Jha pointed out that the bulk of his compensation’s actual value rested on increasing shareholder value – i.e., he would be paid for performance.
Many analysts acknowledged their initial surprise that Motorola had landed such a prestigious catch, but Wall Street suddenly saw Motorola’s once half-empty cup as half-full and sent the stock up 12% last week. Within the wireless industry, there was a palpable sense of relief, too, that Motorola’s new leader was a known personality who had earned the affection, as well as the respect, of those around him.
So much for Jha’s motivation.
Looking ahead
Now for his to-do list.
Analysts appear to agree that if anyone can produce a turnaround, Jha has the technical prowess to do it. But the mobile-phone business is built on a complex matrix of various elements, of which technology is one. Another critical element, as Jha acknowledged last week, is the consumer-facing design and marketing work.
Which features, on which platforms, wrapped in which form factors, at which price points will fly in which market segments?
“This will be an enormous challenge,” said Avi Greengart, analyst at Current Analysis. “Motorola’s physical designs haven’t been the problem. Even today its products are physically attractive. The user interface and underlying software, however, is where Motorola needs help.”
“This is an area, for instance, where Apple has a tremendous advantage,” Greengart added. “Steve Jobs understands very well what his set of customers want. That’s as much art as science. Data helps, but consumers don’t always know what they want until you show it to them.”
Favorable metrics
Some of Motorola’s financial and market metrics have stabilized, leading Strategy Analytics to ask rhetorically whether the company’s second-quarter numbers were “signs of an L-shaped recovery”? A few points:
– Motorola’s shipments of more than 28 million handsets in the quarter, though down 21% from the year-ago quarter, reflected the slowest rate of decline since the first quarter of last year;
– revenue, down 22% from the year-ago quarter, showed a sequential improvement;
– operating margins for the quarter, at negative 10%, represented a sequential improvement;
– average selling prices stabilized, down only 1% over the year-ago quarter – a period in which Nokia Corp.’s ASPs showed an 8% annual decline – reflecting an improved mix of new products and healthier retail prices;
– that product mix relies less on Razr and more on follow-on products; Razr and Razr2 accounted for 31% of shipments in Q4 2007, but only 15% in Q1 2008.
“I’m making a call here,” said Bonny Joy, analyst at Strategy Analytics. “Motorola’s numbers are coming in at a point where Motorola has bottomed out. It’s for Sanjay (Jha) to build from here. He will not have to work at preventing a further slide.”
That Jha has declared Motorola’s portfolio will be 50% 3G going forward – up from 15% today – also lends credence to the potential for a turnaround to build in coming quarters, Joy said.
Competitively, Jha brings a unique perspective, according to Joy. His perch at Qualcomm gave him visibility into how Samsung Electronics Co. Ltd. and LG Electronics Co. Ltd. addressed their 3G rollouts by literally flying large teams of engineers at great expense to their carrier customers’ locations to smooth customization efforts and launches. That technique had helped Samsung and LG effectively challenge Motorola’s position and can help Motorola fight back, the analyst said.
Going forward
Not everyone, of course, is ready to declare that Motorola has hit and escaped a trough.
“Calling it a trough might be going too far,” said Thornton at Avian Securities. “We’re seeing stabilization.”
Motorola executed well in a tough environment in the second quarter, the analyst said. The company’s balance sheet and cash flow improved. But “of course you want to see multiple data points,” he said.
“Now, they have a capable leader and it’s an execution game,” Thornton said.
The metrics Thornton will watch going forward are the traditional financial and market metrics: improved profitability (margins), cost management, the crucial product roadmap and market share in various regions. That also applies to the company’s remaining two businesses – the home and networks mobility unit and the enterprise mobility unit.
To spin, or not to spin?
“I think they’re intent on spinning off the handset division,” Thornton said. “Sanjay wants to lead a public company and his compensation is geared towards rewarding a spin-off.”
But the company’s effort to determine the costs and benefits of a spin-off will play a role, the analyst said. The potential upside must outweigh the complexities and one-time costs of allocating capital, debt, facilities and personnel between the core company and the newly fledged handset company.
Time is of the essence.
Jha’s “sense of urgency” can galvanize the remaining Motorola team and help attract new talent, according to Joy.
And Motorola’s promise to roll out 34 new models in the second half of the year is proof the pipeline isn’t empty – a critical element to near-term recovery, Thornton agreed.
“They’re going to live or die over the next 18 months over what’s already in the pipeline,” Greengart said. “I assume that Motorola’s cupboard isn’t entirely bare.”
