Qualcomm, whose year got off to a rough start when Samsung decided not to use the chip maker’s new Snapdragon 810 processor in its Galaxy S6 smartphone, is now in the process of cutting 15 percent of its workforce and is considering splitting the company in two.
After weeks of speculation about what direction the vendor would take, CEO Steve Mollenkopf on July 22 said that Qualcomm will slash annual costs by about $1.4 billion through such measures as layoffs, streamlining the engineering organization, shedding some facilities and outsourcing work to lower-costs regions.
At the same time, the company is changing executive compensation policies, restructuring its board of directors to fit more line with the desires of major shareholder Jana Partners, and promising to return at least 75 percent of its free cash flow to investors.
All this will be done without harming Qualcomm’s efforts in the mobile chip business, its expansion into growth areas like the data center, networking, small cells and the Internet of things (IoT), or its investments in R&D, which will remain at about $4 billion annually, Mollenkopf said.
The CEO made his statements while on a conference call with analysts and journalists to discuss its fiscal year third-quarter financial numbers. The company saw revenue hit $5.8 billion for the quarter, a 14 percent drop from the same period last year, and net income come in at $1.2 billion a 47 percent decline.
Mollenkopf said the company is getting pressure from several market segments, including the 80 percent or so share Apple and Samsung have of the high-cost premium smartphones, which leaves little room for other device makers that use Qualcomm processors. Qualcomm, the world’s largest vendor of mobile systems-on-a-chip (SoCs), also is seeing less demand in China for systems that are powered by its processors.
The moves the company is making now are designed to bring Qualcomm’s cost structure more in line with the business landscape, the CEO said.
“These initiatives are focused on areas within our control, including making sure we have the right cost structure for the future, a corporate structure that maximizes value and will best position us for the strategic opportunities ahead within a dynamic industry landscape, the appropriate capital structure and level of dividends and share repurchases, the optimal board composition and management incentives, and a capital allocation plan that ensures that our investment dollars are spent in areas with the most promising risk-adjusted returns,” he said during the call. “These steps are being implemented on an accelerated timeline and are designed to help us improve execution, enhance financial performance, and drive more profitable growth across the company without jeopardizing our ability to retain and build upon our technology leadership position in both our core and new businesses.”
The company has about 31,000 employees, so a 15 percent reduction comes out to more than 4,600 jobs.
Mollenkopf said Qualcomm executives also are looking at restructuring options, including possibly splitting the company in two. The review of the options will continue throughout 2015, with decisions coming by the end of the year, he said.
The moves come after a difficult first half of 2015, which began with Samsung’s rejection of Qualcomm’s Snapdragon 810 SoC for its new Galaxy S6 smartphone. Samsung officials reportedly were concerned about hearing issues around the new chip. The company also began getting pressure from Jana executives—the investment firm holds about $2 billion worth of company stock—to reduce costs, return more money to shareholders and possibly break up the company, probably by separating the chip unit from the patent-licensing business.
Qualcomm to Cut 15 Percent of Jobs, Considers Breakup
Mollenkopf said no decision has been made regarding a breakup, but the company did make some changes to the board of directors, bringing two new members on board, announcing the departures of others and promising to appoint another independent director with Jana’s input.
“I think it’s time to take a fresh look, and I think that’s what we’re describing,” Mollenkopf said. “There’s no foregone conclusion either way here, but we want to make sure we’re doing a thorough look to make sure that we’re looking at all ways to drive shareholder value.”
The company has had other struggles, including antitrust investigations in such areas as the United States, China, South Korea and, most recently, the European Union.
In addition, Qualcomm is dealing with a changing smartphone market that includes both a block of the premium space dominated by two vendors, an unpredictable China market and falling average prices. In May, IDC analysts said they expect smartphone shipments worldwide will grow 11.3 percent in 2015, a drop from the 27.6 percent growth in 2014.
Patrick Moorhead, principal analyst with Moor Insights and Strategy, said the moves by Qualcomm executives amount to an overreaction to the demands of a single shareholder, Jana Partners.
“I think they have things they need to do to remain competitive … but I don’t think they need to talk about potentially breaking up the company,” Moorhead told eWEEK.
The company’s problems started when Apple unveiled a 64-bit mobile processor for its iPhones, he said. Qualcomm at the time answered by rolling out 64-bit SoCs that used ARM’s cores rather than its own. Qualcomm officials have said they will return to custom cores for its upcoming Snapdragon 820.
“If they hadn’t lost Samsung, we wouldn’t be having this conversation,” Moorhead said.
The problem with what Qualcomm officials are talking about is that while the moves may be good for shareholders, there’s no indication how they will ensure that Qualcomm chips make their way into new high-end devices from Samsung or other OEMs, he said.