Qualcomm (NASDAQ:QCOM) struck a deal with an activist shareholder and agreed to cut $1.4 billion in costs, slash up to 15 percent of its workforce, change some of its corporate practices and review whether to split up its chipset and licensing units. The announcement, which came as the silicon giant reported disappointing earnings, was largely in line with the demands that the investor, hedge fund Jana Partners, had spelled out in mid-April.
Qualcomm has roughly 30,000 employees, so a 15 percent cut would imply that Qualcomm will slash up to 4,500 jobs.
Jana, which has invested $2 billion in Qualcomm and is one of its largest shareholders, wrote in a letter to investors in mid-April that Qualcomm's chipset business is "essentially worthless" at current valuations. Jana wrote that Qualcomm should also cut costs, increase stock buybacks and alter its executive-compensation plans, financial reporting and board of directors.
Importantly, Qualcomm said its board and management, with the assistance of outside financial advisors, "are conducting a review of the company's corporate structure (including possible business separation alternatives), capital return opportunities and other potential strategic and financial alternatives available to the company to create stockholder value." Qualcomm said it would not comment on the review until it is completed, which is expected by the end of 2015.
While most of the company's revenue comes from chipset sales, around two-thirds of its profit comes from royalties it collects on patents from CDMA, LTE and other technologies used in phones around the world, whether or not they have Qualcomm's chips inside.
As part of the $1.4 billion cut in spending, Qualcomm will cut around $300 million in annual share-based compensation grants. The company expects to achieve the cost cuts by the end of September 2016. Qualcomm said the cost cuts will come from "reductions in headcount and temporary workforce, streamlining the engineering organization, reducing the number of offices and increasing the mix of resources in lower-cost regions."
Qualcomm said it expects to incur approximately $350 million to $450 million in restructuring and restructuring-related charges, of which approximately $100 million to $200 million is included in its fiscal fourth quarter, which runs until the end of September. "While these specific cost initiatives are expected to be fully implemented by the end of fiscal year 2016, the company will continue to examine its cost structure for additional efficiencies that enhance profitability without sacrificing its future growth potential," the firm said.
"We are making fundamental changes to position Qualcomm for improved execution, financial and operating performance," Qualcomm CEO Steve Mollenkopf said in a statement. "We are right-sizing our cost structure and focusing our investments around the highest return opportunities while reaffirming our intent to return significant capital to stockholders and refreshing our board of directors."
Qualcomm said it intends to "focus its investments in technologies that scale across core smartphone and adjacent growth opportunities, such as in its leading modem and other differentiated technologies." Qualcomm is reducing its investments outside of its core chipset and licensing units "and will focus these investments around the highest-return opportunities, including data centers, small cells and certain IoE verticals."
As part of the deal with Jana, Qualcomm is adding two outside directors to its board: Palo Alto Networks CEO Mark McLaughlin and former Fox executive Tony Vinciquerra. Qualcomm will soon add a third new board member and said two current board members are retiring and two others plan to step down when their current terms end.
Qualcomm said it is "is committed to continuing to return a minimum of 75% of free cash flow to stockholders through dividends and repurchases going forward, in addition to the previously announced $10 billion stock repurchase program to be completed by March 2016. Changes to the capital return program will be considered as part of the board and management's review of financial and structural alternatives."
Qualcomm said its board "plans to change Qualcomm's executive compensation program by adding an additional returns-based metric for performance-based equity awards and taking share-based compensation provided to the company's executives and other employees into account when calculating earnings per share for use in determining executives' annual cash bonuses."
Meanwhile, for its fiscal third quarter Qualcomm reported that revenue fell 14 percent year-over-year to $5.8 billion. The company's net income in the period plunged 47 percent to $1.2 billion.
Qualcomm has been facing pressure from both lower-cost Chinese competitors as well as intense scrutiny from regulators into its sales practices. Earlier this year Qualcomm reached a settlement with Chinese antitrust authorities and agreed to pay a $975 million fine and change its licensing practices in China. The European Commission said it has recently started two antitrust investigations into Qualcomm's practices in the European Union.
"Qualcomm has been and will continue to be the industry leader in mobile technologies," Mollenkopf said. "We have tremendous advantages and IP leadership, and we are very well positioned to capitalize on the significant long-term opportunities before us as mobile computing dramatically expands beyond the smartphone. The actions we are taking today are designed to ensure that we are properly structured to seize these opportunities while delivering improved near-term performance. I have great confidence in our employees and our ability to implement this new plan and I look forward to providing our stockholders with quarterly updates on our progress."
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