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Loving it when a Qualcomm plan comes together

Loving it when a Qualcomm plan comes together
by Don Dingee on 07-22-2016 at 4:00 pm

Corporate layoffs are always a touchy subject. I think that’s because there is skepticism that one round of layoffs can turn into two, then if business still doesn’t improve the spiral accelerates into more rounds. Too many rounds indicate management didn’t really have a clue what was going on in the business, instead trying to placate shareholders with action.

“Rightsizing” done right involves more of a strategy, with personnel actions combined with other financial steps plus sales and marketing actions to restart top-line growth. (Tom Peters: “You can’t shrink your way to greatness.”) The trick is to take out enough people, once, and realign the entire organization and incentives around that new figure.

About this time last year, instead of celebrating its 30th anniversary, Qualcomm dropped a 15% workforce reduction as part of its strategic realignment plan. It’s been hard to tell if that worked. New data in Qualcomm’s 3Q16 earnings release shows signs that the SRP initiatives are getting traction. A presentation released on July 20[SUP]th[/SUP] outlines progress on the SRP:

1) On track for $700M cost savings in FY16, $100M more than the original estimate.
2) Reaffirmation that the current corporate structure (with both licensing and product activity) delivers better value
3) $5.9B returned to shareholders in the first 9 months of FY16 (dividends plus repurchases)
4) Director turnover – 7 retirements, 3 additions – reduced average tenure to about 5 years
5) Performance-based executive compensation steps implemented
6) Focused investments, including completing the CSR acquisition and setting up a JV with TDK for RF front-end solutions

It always helps to issue conservative quarterly guidance and then outperform it. Qualcomm hit the top end of their revenue guidance at $6.0B, and exceeded unit shipment guidance by 6M parts at 201M. Combined with a better cost story, EPS outperformed guidance by 16 cents.

A few charts portray an interesting story. This is MSM chip shipments by calendar year:

Next is 3G/4G device shipment estimates. The fine print on this slide is a chilling note given the claims of international “cheating” heard in Cleveland last night; here it is verbatim:

“Global 3G/4G device shipments represent our estimate of CDMA-based, OFDMA-based and CDMA/OFDMA multimode subscriber devices shipped globally, excluding TD-SCDMA devices that do not implement LTE. We continue to believe that certain licensees in China are not fully complying with their contractual obligations to report their sales of licensed products to us, and certain companies, including unlicensed companies, are delaying execution of new license agreements. As a result, we do not believe that all global 3G/4G device shipments are currently being reported to us.”

The last table affirms that while device shipments are trending up, device ASPs (the basis for Qualcomm royalty payments) are headed down. That could represent a mix of lower priced smartphones in Asia, cheaper IoT devices, and a maturing of older product lines.

Qualcomm’s 4Q16 guidance has yearly revenue in the range of a 1% decrease to a 14% increase – and I’m guessing it will be closer to that top figure. EPS will come in anywhere from 15 to 26% improved. They resisted the calls to split the company and instead laid in a plan to fix the current business while still investing in the future; their R&D and SG&A expenses were $7.8B in FY15 and are expected to drop only 3 to 5% this year.

I’m not trying to sell stock here. (Again, I don’t own shares of QCOM, or anything else I write about.) To me this is a refreshing story about a firm that took decisive, thoughtful, multi-faceted action and may have turned the corner. We could have a conversation on near-term versus long-term, but it’s much easier to execute a long-term strategy when the building is not on fire and people aren’t fearful for their jobs. I’m sensitive to the human costs that came with a 15% reduction, but I’m also mindful of the economic benefits a healthy Qualcomm can deliver – for themselves and the electronics industry at large.

Do you have your copy of “Mobile Unleashed” yet? Chapter 9 is dedicated to the origin story of Qualcomm, and Chapter 10 delves into the Chinese contingent of ARM licensees.

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