Qualcomm: chips off the block

For a mature tech company, the trick of the trade is to choose what to exit, and when. Qualcomm, founded 30 years ago, has made some smart exits, such as selling its handset business in 1999 and its infrastructure business that same year. Is it now time for the company to bow out of its chipset business, too?

Qualcomm has openly considered this idea in the past, and recently investors have started clamouring for it as well. The most valuable part of Qualcomm is considered by analysts to be its licensing business, which supplies most of the IP for 3G and 4G wireless in smartphones. These licensing royalties account for just a quarter of revenue, but two-thirds of profits. Meanwhile Qualcomm's chipset business brings in the bulk of revenue but less than half of profits. The businesses can complement each other when a new wireless communication standard is being introduced: for example Qualcomm can develop the IP behind a new standard like LTE (Long Term Evolution), and then simultaneously develop chipsets that incorporate LTE to prove how the technology works. But this synergy matters less at a time like the present, when Qualcomm already licenses a large majority of global handset, Credit Suisse points out.

Breaking up a company can make sense if one part of the company is weighing the other down, or if different segments have different growth trajectories. But in this case, both of Qualcomm's business are facing similar headwinds, which has helped drive its share price down 17 per cent in the past 12 months. The licensing business has suffered declining revenues and profits, due to falling prices for smartphones (royalties are paid on the price of the phone) and to smaller royalty rates (such as the recent settlement in China). The chipset business has also seen growth slow, and is under pressure from increased competition from companies like MediaTek. Nevertheless chipsets are Qualcomm's only source of profit growth.

Sure, the company might want to consider selling if a willing buyer for the chipset business came along at the right price (CS puts the enterprise value of the chipset business at $43bn). And Qualcomm's shares do look cheap right now; its enterprise value is 15 times 2014 free cash flow, near five-year lows. But splitting up would not help fix the challenges, or the valuation, of either the chipset or the licensing business. In times of trial, Qualcomm's businesses may in fact be better together.

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