Keeping It Together

Calls for Qualcomm’s Break-up Are Misguided

Qualcomm_lQualcomm reported mixed quarterly results yesterday, with revenue of $6.9 billion up 8% year-on-year but down sequentially from $7.1 billion. Operating income was $1.2 billion, down 33% year-on-year and 35% sequentially. Net income reached $1.1 billion, a decline of 46% year-on-year and 47% from the previous quarter. Revenue and profits exceeded expectations, but the company’s projections for the current quarter sent its share price down 3% in after-hours trading.

Qualcomm’s more pessimistic forecast is based on the fact it will not be present in Samsung’s current iterations of premium products, and on its absence as the main processor in the ever-strengthening Apple iPhone range. This will put pressure on Qualcomm’s management to deviate from what some consider a business-as-usual approach to development. Competitors including Broadcom and Intel have enjoyed significant increases in share prices in the past year, but Qualcomm’s stock has fallen 13%. The likes of activist-investor firm Jana Partners have been pressing management to unlock shareholder value through several possible methods, including a split of the company between its patent licensing division (QTL) and chipset unit (QCT). This isn’t Jana’s highest-priority proposal (the firm has suggested other changes for Qualcomm, such as a management shake-up), but the company’s recent fiscal projections could create a drive for drastic measures.

CCS Insight doesn’t believe that such a move would be in the best long-term interest of Qualcomm. The company’s success in the past decade has been largely thanks to the highly symbiotic role of its chipset and licensing businesses. Research and development for its chipset segment has developed a valuable portfolio of intellectual property that generates revenue itself. The profit from the licensing business is critical for investment into research and development, which reinforces the cycle: chipset progress creates intellectual property, which generates revenue for QTL and is reinvested into chipset development.

Qualcomm is facing growing competition from Intel and Samsung, alongside pricing pressure from MediaTek. QTL profit will become important in maintaining technology leadership and investment in research and development. Splitting Qualcomm would only make sense if regulatory pressure becomes overwhelming.

It’s unclear how the two entities would work together. QCT would amass its own licensable patents over time, leading to what would appear to be an infinite regress.

The pressure on Qualcomm’s management comes as industry players are pursuing opportunities in connecting wearables, cars and household electronics. Qualcomm’s part in AllJoyn and the AllSeen Alliance has seen the company take a leadership role in some regards, but its mobile-centric approach may not be optimal for all segments of the Internet of things.

The costs and requirements of the research and development of chipsets continue to increase, and this isn’t a time to shed synergies. QTL has been a cash cow for product development, and will be needed as 5G standardisation and research ramps up. As smartphones and tablets become highly homogenized, Qualcomm should focus on enabling industry innovation under the hood with the likes of its ultrasonic-based Snapdragon Sense ID fingerprint reader.

The concerns of Jana Partners are warranted, but Qualcomm’s current problems are manageable. The company has proven it can innovate, but it must execute — and should remain whole to do so. Qualcomm is better together.

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