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Qualcomm, Inc. Begins Layoffs

By Ashraf Eassa - Apr 25, 2018 at 12:33PM

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Here's what this means for investors.

When Qualcomm (QCOM -1.38%) was in the midst of trying to block a takeover by fellow chip giant Broadcom, the former came out and pledged to cut $1 billion in costs in order to help it achieve its long-term earnings-per-share growth target.

As Qualcomm tries to make good on that promise, Bloomberg reports that the company has started axing roughly 1,500 jobs in California.

Two Qualcomm Snapdragon chips.

Image source: Qualcomm.

"The layoffs in California represent the bulk of the cuts, though some positions will be eliminated in other locations," according to Bloomberg. 

Let's go over what these layoffs mean for Qualcomm shareholders. 

Cost cuts boost profits

The good news for investors is that this should have the effect of boosting Qualcomm's net income and earnings per share, even without a substantial change in the company's business performance. No company, especially a large one like Qualcomm, is perfectly efficient -- there's always some bloat that can be cut out to improve efficiency. 

That, however, is where the good news ends. 

Large layoffs have negative consequences

The problem with large layoffs (which are generally highly publicized, as this one is) is that they can negatively impact a company's business performance in ways that aren't immediately obvious in its financial results. 

First, while companies try to lay off so-called weaker employees, the reality is that often times good -- even great -- workers slip through the cracks for reasons that are more political and less about actual work capability. 

Those good-to-great employees will almost certainly wind up at competitors, strengthening the competition at Qualcomm's expense. Don't be surprised to see companies like Intel (Qualcomm's main competitor in stand-alone modems), MediaTek, and Samsung (which competes directly with Qualcomm in integrated mobile processors) trying to aggressively scoop up those impacted by Qualcomm's cost-cutting.

Beyond the risk of losing good talent, large layoffs can be highly demoralizing. It can lead some employees to fear for their jobs as they ask whether they'll be next, which means that they'll be sending out resumes to competitors. For others, seeing valued colleagues and friends being forced out the door can make them want to seek other opportunities as well. 

And, finally, when such layoffs are widely communicated, it can discourage talent from seeking positions with the company -- at least for a while until things have cooled off.  

Sometimes layoffs are necessary to ensure a company's long-term survival, but what appears to be the case here is that Qualcomm wasn't careful about keeping its operating expenses in check, and now that there are signs of trouble (e.g., Apple lawsuit, slowing smartphone market), it has to cut back. 

Qualcomm's path forward

Qualcomm will get through this round of layoffs, and although the risk of the negative consequences that I outlined above is very real, eventually things will get better. What Qualcomm needs to do, though, is to be more careful about its spending from here on out: The company should strive to always spend what it needs to and not a penny more.

Not only would being more careful allow Qualcomm to maximize profits (and, ultimately, stockholder value), but it would allow the company to avoid having to do mass layoffs when it hits a rough patch.

Ashraf Eassa owns shares of Intel and Qualcomm. The Motley Fool owns shares of and recommends AAPL. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool recommends Broadcom Ltd and Intel. The Motley Fool has a disclosure policy.

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