Qualcomm confirmed the implementation of a “Strategic Realignment Plan”, which Steve Mollenkopf, its CEO, said represent “fundamental changes” for the company.
This includes “aggressively right-sizing” the company, with the removal of $1.4 billion in spending, including a $300 million reduction in annual share-based compensation grants. Cost savings will include job losses (around 15 per cent of the workforce is likely to be affected), “streamlining the engineering organisation”, reducing the number of offices, and increasing the mix of resources in lower-cost regions.
It is also adding new directors to its board “with complementary skills”, while reducing the average tenure, and will “further align executive compensation with performance, including returns of investments”.
The company has also inked an agreement with activist shareholder Jana Partners, which includes it getting board-level representation. Jana has questioned Qualcomm’s valuation and mooted options including splitting Qualcomm’s licensing and chipset businesses.
And on Qualcomm’s list is “reviewing alternatives to the company’s corporate and financial structure”. It noted that it “does not expect to publicly comment on this review prior to its completion, which is expected to occur by the end of the calendar year”.
Qualcomm has looked at separating the businesses before, but now claims that with the continued evolution of the industry “it’s time to take a fresh look”. In a conference call, Mollenkopf said that there is “no foregone conclusion either way”, and that it has “some new eyes coming in” – one of the new directors is Tony Vinciquerra, a former Motorola exec who was “involved in evaluating and implementing its separation”.
Unsurprisingly, the plan also includes “disciplined investment in areas that further Qualcomm’s leadership positions, build upon the company’s core technologies and capabilities and offer attractive growth opportunities and returns”.
It will reduce its investments outside of licensing and processors – the company has made a number of brave bets in the past, with mixed results – and will focus these investments on areas with the highest return opportunities, such as data centres, small cells and IoT.
“Our Strategic Realignment Plan is designed to drive meaningful change in the near-term – without jeopardising our ability to retain and build upon our technology leadership position and create long-term value for our stockholders,” Mollenkopf said.
Outlook and Q3 results
Qualcomm reduced the outlook for its semiconductor business in the fourth quarter, “driven primarily by factors impacting premium-tier demand”. These include “increased concentration” in this segment reducing demand for some Qualcomm-powered devices; lower demand for its premium chipsets from an unnamed customer; and lower sell-through in China of some products using its premium-tier silicon.
While much attention has been placed on Qualcomm’s Snapdragon 810 processor, which has been dogged by reports of heat issues impacting power consumption and performance, in Qualcomm’s conference call George Davis, CFO, said that the bigger issue is the loss of a “major vertical customer” – Samsung, although it was not named – and that other vendors are struggling to shift high-end devices.
With regard to its licensing business, it said that despite its resolution with China’s NDRC, “we continue to believe that certain licences in China are not fully complying with their contractual obligations to report their sales of licensed products to us”. It said that it is making progress with agreements based on new Chinese terms, with “several other” licences intending to retail existing contracts.
It now anticipates Q4 revenue of $4.7 billion to $5.7 billion, compared with prior guidance of $6.7 billion. Prior full-year guidance of $25 billion to $27 billion has also been trimmed to $24.5 billion to $25.5 billion – which even at the high-end will mark a year-on-year decrease.
For the quarter to 28 June 2015, Qualcomm reported a profit of $1.18 billion, almost halved from $2.24 billion in the prior-year period, on revenue of $5.83 billion, down 14.3 per cent from $6.81 billion.
It said that shipments of its MSM chipsets was flat at 225 million units.
It noted that the period included $142 million of charges from a goodwill and assets impairment related to one of its display businesses.