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Will Qualcomm Pull the Plug on Its Server Business?


May. 22 2018, Updated 9:30 a.m. ET

Qualcomm’s cost-cutting program

In an earlier part of the series, we saw that Qualcomm (QCOM) is facing competition in its dominant market of smartphones because of trade tensions between the US and China. It is also facing challenges in its efforts to diversify in the fast-growing markets of IoT (Internet of Things) and automotive through the acquisition of NXP Semiconductors (NXPI).

Amid these challenges, Qualcomm has been making efforts to enter new markets—such as PC, server, and wearables—organically. After Broadcom’s (AVGO) attempt to take over Qualcomm, the latter’s management pledged to cut annual costs by $1.1 billion to improve profits and strengthen investors’ confidence in Qualcomm’s standalone business.

As part of the cost-cutting program, Qualcomm announced 1,500 job cuts. At the fiscal second-quarter earnings call, Qualcomm’s chief executive officer, Steven Mollenkopf, stated that the company would cut its spending in non-core areas.

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Rumors that Qualcomm might exit server market 

In less than one month since the earnings release, there have been rumors about Qualcomm considering exiting its server business. A Bloomberg article, citing sources familiar with the matter, stated that Qualcomm is exploring options to exit the server market and considering dissolving the business or selling it to a third party.

A look at Qualcomm’s server business

In early November 2018, Qualcomm launched its first ARM-based Centriq 2400 server processor built on Samsung’s (SSNLF) 10-nm (nanometer) node. At that time, Qualcomm claimed that its 64-bit server processor delivers better performance-per-dollar to performance-per-watt than Intel’s (INTC) Xeon Platinum 8180 processor.

Qualcomm targeted Centriq at pure high-density cloud data centers, which require blade server architectures, higher costs, and higher power efficiency. It also received backing from big cloud partners like Alibaba (BABA), Microsoft (MSFT) Azure, Red Hat (RHT), and server makers like Hewlett Packard Enterprise (HPE). Since then, there has been no mention of Centriq.

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The server market is already dominated by an even bigger player, Intel, with 99% of the market share. Moreover, it has high entry barriers. It is very expensive to design a server chip, and the volume is low in this market. However, low volume is compensated by high margin products. Another major drawback for Qualcomm is the lengthy cycle of getting customer qualification, which means it cannot quickly cash out this opportunity.

Is it wise for Qualcomm to exit the server market?

Right now, Qualcomm doesn’t have the bandwidth to spend in a market where there are several entry barriers, as the efforts would be high and rewards would likely be low. It would make financial sense for Qualcomm to discontinue its efforts in the server market and focus on fast-growing markets like IoT and automotive. The case is similar with the PC market.

While exiting from these markets would help Qualcomm save costs and enhance its returns, it would drive the company away from its goal of diversifying into other markets.

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