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Technology Stocks : Qualcomm Moderated Thread - please read rules before posting
QCOM 58.79+0.2%Jun 20 5:20 PM EDTNews

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From: Jim Mullens1/2/2018 1:47:34 PM
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BRCM v QCOM R&D- Huge Revenue/ engineering cuts - IPR / innovation Weakened .............................

Despite very telling comments attributed to BRCM’s CEO Hock Tan, there appears to be some question as to the severity of cuts to revenue, employment, and R&D should BRCM prevail and acquire QCOM via a hostile takeover. In this post I hope to clarify this issue with some interesting historical financial metrics bolstered by a few recent articles that paint a dire outcome to the trajectory of future innovation growth under BRCM’s slash & burn management style that focuses on short term gains rather than QCOM’s approach...” ...(R&D) bets with long runways but huge payoffs...” (1)

It should also be noted that it is no coincidence that BRCM’s attempted hostile takeover is the result of AAPL’s current groundless anticompetitive litigation against QCOM wherein an AAPL win would also severely reduce QCOM’s licensing revenues, its R&D expenditures, and its engineering staff. The AAPL litigation resulted in over a 20% QCOM share price drop in early January ’17, a weakened share price that directly led to BRCM’s opportunistic hostile bid. Further evidence of “cooperation” between BRCM and AAPL, is BRCM’s CEO Tan Hock’s statements (7) alluding to the two companies working together to reduce/ eliminate QCOM royalty charges, the significant profit generator that funds its R&D.

As a point of reference, over the past four years, including the major cost reduction restructuring years, QCOM has continued to spend close to $5B annually on R&D or about 19% of revenues on a pro forma basis (higher with GAAP).

QCOM R&D expenditures- ($B) (QCOM Financials)
.................Rev...........R&D .....%
FY 14.......$ 26.5........$4.8......18.0%
Fy 15...........25.3..........4.8......18.9%
Fy 16...........23.5..........4.5......19.2%
Fy 17-..........23.2..........4.8.......20.9

BRCM R&D expenditures- ($B) (Reuters F14/15, F16-18 Credit Suisse (ex-SBC) BRCM report 12/17
.................Rev...........R&D ........%
FY 14.......$ 4.3B........$0.7B.......16.2%
Fy 15............6.8............1.0.........15.3%
Fy 16..........13.3............2.2.........16.8%
Fy 17-q1 ..... 4.1............0.7.........16.0%
..........q2.......4.2............0.7.........16.1%
..........q3.......4.5............0.6.........14.6%
..........q4E....4.8.............0.7........13.6%
........tot.......17.7............2.6.........15.0%
Fy18 est.....20.9............2.7.........13.0%

From the above financials we can see that even in the leaner years when QCOM was significantly cutting costs it continued to emphasize R&D and fund it at close to the same levels annually. BRCM has taken an entirely opposite approach, as its revenue grew via acquisitions its FY17 R&D expenditures grew only slightly and finished the year at only 13.6% of revenue. Noteworthy, Credit Suisse is forecasting FY18 R&D at about the same level ($2.7B) despite revenues growing by18%.

The difference between 19% and 13%-15% of revenues for R&D is huge. At 13% (13% x $23B) QCOM’s R&D would be $3B, a $1.8B (38%) cut. At 15% (15% x $23B) QCOM’s R&D would represent $3.45B, a $1.35B (28%) cut. I would imagine cuts of this magnitude would eliminate all of QCOM’s early stage R&D funding, and more. A $1B cut would eliminate about 5,000 engineers at $200k year with benefits. As the articles critical of a BRCM acquisition (or AAPL win) point out, companies can operate at lower R&D levels for a few years, but after such there will be little or no new technology left to implement. Technology Adoption and the pace of Innovation would slow down considerably. Thus, the impact on QCOM and American’s leadership in innovation would be huge.

Intellectual property attorney James Skyles opines that “...if Qualcomm’s allegations against Apple are true (encouraging foreign government antitrust action) , it would be one of the biggest and most widespread cases of public “regulatory capture” in recent U.S. history....and “...would undermine our patent system and deter investment back into important research and development (R&D) that make the United States a global innovation leader...” (5)

The Trump Administration also strongly supports intellectual property and early-stage innovation stating that..”... Intellectual Property Is King....Stealing proprietary technology and early-stage ideas allows competitors to unfairly tap into the innovation of free societies.....will prioritize ..law enforcement activities to curtail intellectual property theft by all sources ...” (6).

Qualcomm-- perhaps American’s and the world’s littlest known, most miss-understood, and vastly under-appreciated technology / innovation giant— would be sorely missed as I can’t recall another global company that currently comes close to its disruptive achievements, especially in wireless technology (mobile/ fixed), the largest and most significant platform known to mankind.

The new administration is right to recognize the vital importance to America of “early stage-innovation” and Intellectual Property since it’s unlikely America will be able to out-manufacture China and India. The Administration’s use of “early-stage” terminology is also interesting, as that points directly at Qualcomm, and away from companies like Broadcom.

Hopefully, the new administration is fully aware of Qualcomm's past and future importance as a premiere American innovator and that its independence is essential to maintain America’s long-term competitiveness.

Articles>>>

1) Why Broadcom’s offer to buy Qualcomm is still a terrible idea- Olivier Blanchard, December 13, 2017 ... https://tinyurl.com/yabtjkb3

+....”...given Broadcom’s aggressive cost-cutting business practices, it is likely that the future of Qualcomm as an R&D powerhouse for the tech industry would be jeopardized by such an acquisition, which means that a Broadcom-controlled Qualcomm’s ability to generate revenue from long R&D bets is likely to find itself compromised in the future...”

+ “...In my earlier post, I mentioned that unlike Broadcom, Qualcomm makes big bets. Long bets. Industry-changing bets tan can take 7-10 years to pay off. Bets like 3G, 4G, and now 5G. Bets with long runways but huge payoffs...”

2) Qualcomm could lose 30% of workforce, By David Manners 18th December 2017

…………. https://tinyurl.com/ydf5hn5p

‘…Bad news for Qualcomm is that, if Broadcom succeeds in buying it, 30% of its employees may lose their jobs…… over the last four years and five acquisitions by Broadcom, around 30% of the employees of the five companies bought – some 5000 people – have lost their jobs…..Broadcom CEO Hock Tan told the New York Times that the 30% figure is “not far off.”…..It includes figures for business units which are sold off…..Tan said he expects its Brocade acquisition would see a jobs shrinkage from 5,500 to 1,500 as a result of unit sales…..

3) Broadcom And Qualcomm Deal Is A Long-Term Loser- Patrick Moorhead ,Nov 8, 2017
........... https://tinyurl.com/yac6ajxe

+ “..., Broadcom operates as much more of a short-term focused company looking to leverage M&A and short-term R&D to achieve fiscal returns on a quarterly basis. Their R&D strategy tends to focus on low-risk markets where they can be competitive almost instantly on price and demand. ....but if companies do not invest in the future, it is a slow path to nothingness, particularly in tech.

+ It is not hard to make some predictions as to what Tan would do if such an acquisition were to come off. Much like Silicon Valley ax man of yesteryear Mark Hurd, Tan would look to create immediate shareholder value for the market by leaning down the Qualcomm organization..... While this would yield some short-term gains for shareholders, it would essentially cost important jobs within Qualcomm that have been responsible for setting the pace of innovation in the mobile market.

+ Additionally, if Broadcom were to succeed in acquiring Qualcomm, and they did stick to their traditional value creation model it could create a weaker innovation in the United States putting global companies like Huawei in a much stronger position as they would be the likely candidates to step up and attempt to assume the vacancy left by a Qualcomm limiting their R&D efforts. This would just be one more black eye for the United States as Qualcomm has long made the US a leader in this space. Liken it to the downfall of mobile giants Nokia and Ericson leaving the EU with little to hang their hat on in the wireless space.

4) Qualcomm: Large R&D Cuts Could Be Disastrous- Jul. 13, 2017

………… https://tinyurl.com/y7ukq3f2

“…Drastically reduced R&D spend might boost Qualcomm’s profitability over a period of two or three years, perhaps without showing any sort of effect on its licensing royalties over the period, but lower R&D could also result in weak product pipelines that might not be the best revenue generators. Therefore, I’m of the opinion that significant R&D cuts wouldn’t be in the best interest for long-term Qualcomm shareholders…”


5) Foreign Regulators Should Not Be U.S. Competitors’ Secret Weapon, December 15, 2017
..........James Skyles - intellectual property and business law attorney.

............. https://tinyurl.com/ya4xshdv

Qualcomm alleges Apple and Samsung have influenced the FTC lawsuit brought against Qualcomm, and have also encouraged foreign antitrust agencies to investigate and fine the company....., and that both companies would benefit greatly if antitrust agencies in those countries force Qualcomm to charge less to license its cutting-edge technology.....Indeed, if Qualcomm’s allegations against Apple and Samsung are true, it would be one of the biggest and most widespread cases of public “regulatory capture” in recent U.S. history.

These types of strategic actions by regulatory bodies against American companies undermine our patent system and deter investment back into important research and development (R&D) that make the United States a global innovation leader

6) Decoding Trump’s Plan to Rein In China, By SUI-LEE WEE DEC. 19, 2017

............. nytimes.com

It isn’t just about missiles and militaries anymore....Intellectual Property Is King

Stealing proprietary technology and early-stage ideas allows competitors to unfairly tap into the innovation of free societies.....The United States will prioritize counterintelligence and law enforcement activities to curtail intellectual property theft by all sources and will explore new legal and regulatory mechanisms to prevent and prosecute violations.”

7) Tan Hock’s statements –
7a) Broadcom’s Biggest Challenge With Qualcomm, By Dan Gallagher, WSJ, Dec. 8, 2017

.......... https://tinyurl.com/ybh9bryr

Mr. Tan, who prefers to invest in more developed technology that has a closer payoff, wants to “rationalize and restructure” the licensing business in a way that would settle the many legal challenges Qualcomm is currently facing. Bernstein analyst Stacy Rasgon says this likely means licensing revenue falling to about $3 billion a year—less than half of what it generates now. Broadcom’s big challenge will be making that up with better sales and prices on the chip side, while also not falling behind on investing in key areas for the future.

7B) Broadcom has hinted that it would make big changes to Qualcomm's patent licensing business

......... Reuters Nov, 21 2017 .... firstpost.com

A Broadcom spokeswoman told Reuters in early November that it believes that regulators around the world will “welcome this deal as a solution to the double-dipping issue.” Tan said in an interview earlier this month that he believes Broadcom “can be very constructive in resolving these issues and resetting relationships. We would not have embarked on this offer if we were not confident that our common key customers (Apple?) would not embrace...
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