San Francisco - In Steve Mollenkopf’s first year at the helm of Qualcomm, the chipmaker disclosed regulatory investigations in China and the US, lamented licensees that failed to pay in full, and lost crucial business from Samsung Electronics Company, one of its biggest customers.
Revenue this fiscal year is estimated to increase just 3 percent as the smartphone market matures and chip competition rises. That’s a turnabout from the three-year period before Mollenkopf was promoted to chief executive officer, when Qualcomm more than doubled sales. Now, Mollenkopf’s goal is to convince the mobile-phone industry that it can’t keep innovating without Qualcomm’s chips, while bringing new business into the fold from markets like cars and servers, he said.
“We’ve been very fortunate to be successful in the handset space,” Mollenkopf, who joined the company in 1994 and became CEO on March 4, 2014, said in an interview. “Looking forward we’re in a position where that continues to be a good business, but now we want to figure out how to grow in other areas.”
It’s a typically measured response, even as the company faces what may be the most challenging time in its history.
In February, one cloud began to lift when Qualcomm agreed to settle an antitrust investigation in China by paying a $975 million fine and offering discounted license fees on phones for that market. The settlement helped allay concern that the company wouldn’t be allowed to collect royalties in the world’s largest phone market and, for now, shifts investor focus back to whether it can rekindle growth.
“It could have been so much worse,” said Mike Green, a fund manager at American Money Management LLC. “We’re dealing with the Chinese rule of law. They dealt with it.”
Investor confidence
Green said he cut his holdings in the stock by a third last year on concern that the China investigation would undermine Qualcomm’s licensing business. He now wants Mollenkopf to deliver on his promise to look outside the smartphone market to boost chip sales and royalty revenue.
The market hasn’t reflected Mollenkopf’s confidence. In the past 12 months, Qualcomm’s stock has lost about 7 percent of its value, compared with a 24 percent rally in the benchmark Philadelphia Stock Exchange Semiconductor Index.
Shareholders and employees at Monday’s annual stockholders meeting looking for rousing speeches in the face of adversity are looking at the wrong man. Rarely displaying any emotion other than wry amusement, Mollenkopf isn’t the type to shout or bang his fist on a desk. Qualcomm employees and former executives cited all-hands meetings they left feeling like they’d sat through an informative college lecture, rather than a call to arms.
Decision making
In smaller meetings, Mollenkopf prefers to listen and question rather than dominate. He expects subordinates to make decisions for themselves and act on them, according to ex-Qualcomm employees who’ve worked with him, who asked not to be named speaking about their former colleague. It’s a reflection of how he works himself.
“I grew up professionally in this organisation and you develop a leadership style that’s based on authenticity,” he said. “I’m much more competitive than I let go in the public forums. The people I work with day to day know that and they get enough of the spice behind the scenes.”
His self-assurance has already helped Qualcomm make a lot of money. When he was promoted to head the chip division in 2008, he inherited a group that had been investing in a technology that it bet would be the heart of new speedier 4G phone services. Mollenkopf argued that an alternative, called LTE, was going win the race to adoption. He prevailed, and Qualcomm ended up with more than 90 percent of the market for chips that run smartphones linked to the fastest data networks.
Lacking bluster
“I knew what it felt like when something looked like a threat could be an opportunity,” Mollenkopf said. “I’m pretty determined. We turned it into the opportunity.”
According to Mollenkopf, it’s just a matter of time before chips built on ARM Holdings PLC technology - such as Qualcomm’s - grab market share in tablets, personal computers and eventually servers. If that prediction bears out, it could spell the end of Intel Corp.’s more than three decades of dominance of the semiconductor industry.
Like every other chip company, Qualcomm has its eye on the Internet of Things, the term for the push to connect everyday items to the Web using increasingly specialised chips. According to Mollenkopf, the proliferation of such smart devices and electronics will create a market for his technology of 5 billion units by 2018, dwarfing even the 1.5 billion mobile phones the company expects to be sold next year.
Use of cash
Still, investors want more concrete evidence that this potential is going to turn into revenue. Qualcomm has efforts to get its chips into new industries such as automotive, home entertainment, medical devices and even robots.
“I’d like to see some continued wins,” said Michael Shinnick, a fund manager at Wasatch Advisors. “That would give greater confidence.”
Shinnick sold his Qualcomm holdings last year on concern the setbacks in China might undermine the company’s licensing business. He’s now considering buying the stock again. While he doesn’t expect a return to double-digit annual percentage growth in revenue, he said the company has the opportunity to use more of the cash it generates to buy back stock.
Mollenkopf’s push into new industries will need to be supported by the chip business’ continued success in mobile. After Qualcomm led the LTE market for more than two years and provided processors for almost all flagship smartphones, Samsung, the world’s largest supplier of the devices, decided not to use a Qualcomm chip in its new Galaxy S6. The South Korean company, also the world’s second-largest chipmaker, is opting for an in-house design.
Next one
Mollenkopf’s reaction? He’ll win the next one. The company is planning to begin offering an improved version of its own processors later this year. The 810 model rejected by Samsung works fine - “we just wish it had won one more design”, Mollenkopf told analysts on a conference call in February.
Qualcomm gets the majority of its profit from licensing technology to handset makers, whether they use its chips or not. The company has generated more than $30 billion in revenue in the past five years from that business, inviting challenges to those royalty payments, which can equal as much as 5 percent of the selling price of every phone sold.
While Qualcomm has resolved the Chinese investigation, it’s also facing an investigation by the US Federal Trade Commission of its licensing division regarding fair and reasonable commitments, and the European Commission is examining rebates or financial incentives related to the company’s baseband chip business.
‘Smoke blowers’
Handling those and persuading phone makers to sign royalty agreements is the job of Mollenkopf’s second-in-command, Derek Aberle, a lawyer who rose through the ranks of Qualcomm’s licensing organisation.
“I wanted to have a president that brought something different than what I had,” said Mollenkopf. “He’s a very creative business executive.”
Aberle helped find a solution that would mollify Chinese regulators and avoid the type of concessions that would give customers elsewhere in the world room to demand similar deals, according to American Money Management’s Green.
Like his boss, whom Microsoft approached as a candidate to become CEO last year before Qualcomm promoted him, Aberle remains dispassionate and measured in every answer he gives.
As long as the company’s leadership can deliver a return to growth and keep the lucrative licensing dollars flowing, investors say they don’t care that Qualcomm’s leadership team is short on showmanship.
“I look at the numbers,” Green said. “I don’t need those smoke blowers.”
Bloomberg