Earlier this year, mobile chip giant Qualcomm (NASDAQ:QCOM) announced a new Strategic Realignment Plan as part of a broader turnaround effort. The company's business has been under different kinds of pressure due to slowing growth in the smartphone market as well as "changing industry dynamics," particularly in the premium end of the market.
As part of the Strategic Realignment Plan, Qualcomm had said previously that it would cut upwards of 15% of its total workforce, which translates into potentially 4,500 layoffs. Well, the company has now begun the job cuts. Qualcomm has now cut 1,314 full-time jobs at its San Diego headquarters, according to The San Diego Union Tribune. Qualcomm also cut hundreds of jobs in other locations, but none were more affected than at its headquarters.
The first cut is not the deepest
As Qualcomm begins implementing its restructuring, there are still thousands of more cuts to go before the company is done "right-sizing" its cost structure. Total annual costs for fiscal 2015 are expected to be in the ballpark of $7.3 billion, and Qualcomm is planning to reduce that figure by a total of $1.4 billion (including $300 million in stock-based compensation expenses) by the end of fiscal 2016, which translates into a nearly 20% cut in total costs.
Meanwhile, Qualcomm continues to consider its overall corporate structure, as activist investor JANA Partners (which recently scored 3 seat nominations on the board) has been pushing for a breakup, believing that doing so would unlock value for shareholders under a sum-of-the-parts valuation thesis. Although Qualcomm President Derek Aberle recently told Reuters that splitting the company up might not actually create value, even though Qualcomm and JANA both consider shares undervalued at current prices.
As is common when tech companies face headwinds, Qualcomm says it's now time to "pivot." In a recent interview, CEO Steve Mollenkopf told the local publication, "Now we are in a position where we have to pivot the company." Qualcomm will naturally continue building its smartphone business while simultaneously attempting to address new opportunities. There are several tangential markets that are obvious candidates, since they can leverage many of the same technologies that Qualcomm has built for smartphones.
Mollenkopf mentioned cars as one "great example," as automakers are increasingly adding Internet connectivity and building new experiences. You can't ignore the fact that NVIDIA is in the midst of an identical pivot with its Tegra chips, after the smaller company couldn't compete meaningfully with Qualcomm in smartphones. The irony here is that NVIDIA may now have something of a first-mover advantage with tailoring its chips for cars as well as established relationships. But the auto market moves slow, so Qualcomm has plenty of time to engage with automakers. Qualcomm will also have to face the reality that the auto market is a low-unit market, a stark contrast to the smartphone market, but at least it would be incrementally positive.
Healthcare and the Internet of Things are also high on Mollenkopf's list, since the ongoing evolutions there play directly into Qualcomm's expertise with mobile technology and cellular connectivity. Qualcomm is also turning its attention to the nascent drone market. Earlier this month, Qualcomm announced a new reference platform called Snapdragon Flight, where optimized versions of its processors could power consumer drones. Since Snapdragon chips can perform many of the functions that drones require in one package, Qualcomm believes that it can lead to simpler and more affordable drones, which could in turn spur mainstream consumer adoption.
All the while, Qualcomm continues to repurchase shares to return capital to shareholders, a testament that it really considers its current valuation attractive.
Evan Niu, CFA has no position in any stocks mentioned. The Motley Fool owns and recommends Qualcomm, and recommends NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.