Qualcomm Is Opposed to the Spin-Off of Its Chip Business



Chip business revenue

In 2014, Qualcomm (QCOM) generated revenue of $19.29 billion from its chip business and $7.45 billion from its licensing segment. While baseband chips contribute majorly to Qualcomm’s revenue, the profits are mainly generated by licensing patents for its CDMA (Code Division Multiple Access) cell phone technology. The gross margins for Qualcomm’s chip unit and licensing unit stood at 48% and 88%, respectively, in 2014.

In the above chart, you can see that the semiconductor market is dominated by Intel (INTC). Intel has a 15.4% market share. It’s followed by Samsung, Qualcomm, and Micron Technology (MU). They enjoy market shares of 10.2%, 5.7%, and 4.8%, respectively.

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Qualcomm benefits from the combined business

There are certain conflicts of interest in the combination of Qualcomm’s businesses. This sparked regulatory concerns in the US, Europe, and in China where the firm had to pay a sizeable fine in a deal that lowered royalty rates. Qualcomm has been considering a spin-off of its two businesses, but the synergies of the combined business outweigh the benefits of a spin-off. If Qualcomm had gone ahead with the spin-off, it would have negatively impacted the firm’s ability to leverage patent negotiations in the future.

Jana Partners is an activist hedge fund. In its letter, it mentioned that Qualcomm’s share price has been underperforming compared to the NASDAQ 100 Index over the last 12 months. It also stated that investors are currently placing minimal value on the firm’s chip business segment. Jana Partners also suggested that splitting the business would address this issue.

However, some of the main reasons for the underperformance of the stock have been market and regulatory changes in China, the emergence of 4G competitors, and the inability to qualify as a service provider for the Samsung Galaxy S6.

Qualcomm expects these factors to impact QCT (Qualcomm CDMA Technologies) revenue growth as well as operating margins in the short term. However, Qualcomm expects to remain a market leader in the long run.

To gain exposure to Qualcomm, you can invest in the SPDR S&P 500 ETF (SPY) and the Technology Select Sector SPDR (XLK) ETF. The stock accounts for 0.57% and 2.58% of the portfolios, respectively.


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