Qualcomm’s sales declined 15 percent sequentially to $5.8 billion in the quarter ended June 28, 2015 (Q3 FY ’15), accompanied by a decline in profits to (a mere) 20.5 percent of sales, leading to calls by some institutional investors to break up the company into an IP company (QTL) and chip company (QCT).  Qualcomm did extraordinarily well for decades with exponential growth in sales and consistently strong profits, up until recently holding a 95 percent unit shipment share in LTE chipsets.  It did this by staying at the leading edge in chips and wireless communications technologies.  Did anyone think the gravy train would continue forever?
 


Qualcomm now shares the LTE market with competitors MediaTek, Marvell, Hisilicon, Samsung, Spreadtrum and Intel, and many smartphone OEMs have started to move to lower-priced devices that do not have to use Qualcomm’s premium performance radio chipsets.  China is a big part of the challenge.  Qualcomm recently agreed to pay China $975 million in an anti-monopoly settlement and agreed to lower IP fees for OEMs making phones in China destined for China.  Some China-based OEMs, according to Qualcomm, had been under-reporting phone production to avoid paying licensing fees to Qualcomm.  The silver lining is that the new fee structure should make it more difficult to avoid paying Qualcomm.  China became a significant market for LTE devices in 2014 with about 140 million LTE phones consumed.

Despite the challenges, Qualcomm had an LTE unit shipment share above 65 percent in the first half of 2015, and this included chip shipments into China for production of LTE smartphones intended for domestic consumption in China.
In response to all the shouting by disappointed investors, Qualcomm announced a “strategic realignment” that included a 15 percent staff reduction of about 4,500 people, and change of emphasis away from cellular chipsets for premium smartphones.  Qualcomm also stepped up a stock buyback program and vowed to increase dividends in an effort to shore up its stock price, recently at $60.30 per share, down from $78.51 on October 31, 2014.

In our opinion, breaking Qualcomm into two independent companies consisting of QTL and QCT is a simplistic idea that would be counterproductive.  A fabless semiconductor company such as Qualcomm does not make physical products, but essentially gets paid for its designs and marketing.  One cannot arbitrarily separate the IP from the circuit designs; the designs, to a large extent, embody and ARE the IP.

Qualcomm could possibly spin off essential IP having to do with basic communications processing, modulation / demodulation, signaling and protocols related to the fundamental technologies used in CDMA, W-CDMA and LTE, but such a spin-off (we suspect) would generate much less revenue than the $2 billion per quarter that QTL (Qualcomm Technology Licensing) now generates.  We doubt that spinning off fundamental patents would be at all straightforward, and such a move could endanger the chip operation by making it more difficult to generate new chip designs and IP.

Wouldn’t more aggressive acquisition of high-growth strategic chip businesses that would fill out Qualcomm’s technology roadmap make much more sense than breaking up the company?  Qualcomm’s chip business has become too dependent on premium smartphones, so acquisitions in other areas could help the company diversify and continue to grow.  Candidates that come to mind for acquisition include NVIDIA (graphics display chips, automotive infotainment), NXP/Freescale (IoT, RF power devices, infrastructure & embedded processors), Skyworks (PAs, RF front-ends, analog ICs & discretes), Ambarella (sports cam SoCs) and AMD (server processors). 

Qualcomm claims it’s non-phone business generated $1.6 billion in FY2014 with 60 percent y/y growth, and how quickly this offsets any future decline in Qualcomm's smartphone chip business could decide Qualcomm's chip business future.