Better together: Qualcomm says no to split despite declining profit
- 15 December, 2015 19:28
Breaking Qualcomm up is not the best way to turn its performance around, the company's board has decided.
Qualcomm designs and makes chips, primarily for the booming smartphone and connected devices markets. But in July the company reported lackluster results for the three months to June 28, with a 14 percent year-on-year decline in revenue and 47 percent drop in net profit.
CEO Steve Mollenkopf said then that he planned on "right-sizing" the company's cost structure -- a phrase that turned out to mean laying off more than one employee in seven. He also engaged external advisors to review the company's corporate structure and look at whether splitting the company up would increase its value.
But on Tuesday Qualcomm announced that it planned to keep its chip design and manufacturing operations together, concluding that its current structure puts it in the best position to make profitable products in the long term.
Mollenkopf faces a tough time turning that existing corporate structure around, as revenue and profit have continued to fall since he began the review. The year-on-year revenue decline accelerated to 18 percent for the three months to Sept. 27, although the drop in net profit slowed slightly, to 44 percent, Qualcomm reported on Nov. 4.
Looking ahead to the next quarter, Qualcomm warns that the revenue decline could accelerate further, with a year-on-year drop of between 15 percent and 27 percent, although it expects the fall in profit to slow to 23 percent or less, thanks in part to its cost-cutting program.
Qualcomm's rejection of a corporate split comes after Hewlett-Packard agreed to break up Dave and Bill's legacy, splitting a few weeks ago into Hewlett Packard Enterprise and HP Inc. The day that breakup happened, shareholders did see an increase in value, with the 1.6 percent drop in HPE's share price more than offset by the 13 percent jump in that of HP, defying the conventional wisdom that PCs and printers are on the way out.
Qualcomm, though, defended its existing structure on Tuesday, saying that it benefits twice from its in-house research and development operations, which create new technologies it can license as well as allowing it to improve the products it sells.
The components for smartphones and for the Internet of Things that Qualcomm designs are licensed to other companies for incorporation in their own chipsets. That business model is common in the chip industry -- Qualcomm licenses the processor cores it uses in its designs from ARM, which does not make chips itself.
Qualcomm, though, does makes its own chips, competing with some of its customers. That approach allows it to push its own technologies in the smartphone industry, encouraging other chipmakers to adopt and license them, it said.