For Qualcomm Inc., the smartphone is simply not the cash generator it once was. As profits level off, the San Diego chip maker hopes to improve its fortunes by going into a business adjacent to smartphones. One prospect is the data center. For two years, Qualcomm (Nasdaq: QCOM) has been quietly working on chips for those computers that work behind the scenes, powering the Internet.
But entering the market means taking on Intel Corp. (Nasdaq: INTC), the dominant player in data centers with a reported 90 percent of the market. Observers have mixed feelings about whether Qualcomm is up to the challenge.
Richard Windsor of London’s Edison Investment Research is upbeat. “Qualcomm is the king of execution and if it can get a foot in the door, then there could be real trouble on the horizon for Intel,” he wrote.
Not everyone shares that enthusiasm.
“Intel’s position in the data center appears impregnable,” wrote Mark Hibben on Seeking Alpha, a crowdsourced financial website, in a post titled
“Qualcomm’s Quixotic Quest.”
Christopher Rolland of FBR & Co. noted that Qualcomm’s “heritage is squarely based in mobile rather than server/networking technologies.” His views were republished in the Tech Trader Daily blog in Barron’s.
Qualcomm’s effort is also missing
“fabric and networking assets,” Rolland said — though he added the San Diego company could gain expertise in those two areas by spending some of its cash to buy Cavium (Nasdaq: CAVM) and Applied Micro (Nasdaq: AMCC).
‘Major Milestone’
Despite the inevitable naysayers, Qualcomm was ready to broach the subject of entering the data center in early October.
In what the company called a “major milestone,” the business showed off a server development platform containing a pre-production chip on Oct. 8. The system-on-a-chip contained 24 cores and incorporated transistors formed with an advanced technology called FinFet. The final version of the chip will likely have even more cores, according to a note from Nomura analyst Romit Shah.
The chip also used a technology called ARM, which several observers call a great energy-saver. ARM chips use less power and generate less heat than equivalent Intel processors, and let data centers save on their air-conditioning bills, Windsor wrote.
The chips are designed for “hyperscale data center customers” and meant to carry common data center workloads, Qualcomm said. Two possible uses are in the world of cloud computing: IaaS (Infrastructure as a Service) and PaaS (Platform as a Service). Amazon.com Inc.’s strategy of making cloud computing resources available to customers on demand illustrates both IaaS and PaaS. Other possible uses for Qualcomm’s data center chips could be machine learning and big data.
Qualcomm said the early October demonstration featured the following software stack: Linux kernel version 4.2 along with kernel-based virtual machine virtualization, OpenStack DevStack for OpenStack cloud orchestration, guest virtual machines running a standard Linux distribution along with Apache web server and WordPress.
Separately, Qualcomm said it was teaming up with Xilinx Inc. and Mellanox Technologies Inc. on data center projects.
Analyst Hans Mosesmann of Raymond James thinks the agenda of an upcoming tech conference may offer a clue on how soon Qualcomm is coming to market.
Early Days?
“Qualcomm is not sponsoring and/or exhibiting at the upcoming ARM TechCon conference in November — a must-do event for all things ARM — but is represented in technical sessions, which implies a more passive role and suggests to us that we are likely in early days for this player,” Mosesmann said in a research note.
At another point, Mosesmann estimated that Qualcomm “is likely a year away from any kind of ramp, and we believe the company is seeking potential customer feedback before committing to specific architectural formats and features.”
Mosesmann’s note was actually not about Qualcomm but about technology provider ARM Holdings PLC.
Other market alternatives for Qualcomm — including processors for wearable devices, the Internet of Things, automobiles and electronic health devices — offer long-term potential, Edison’s Windsor argued. However, the data center market is “here and now.”
“Servers,” he wrote, “are big.”
Results Are Coming Nov. 4
The week ahead promises to be a big one for Qualcomm watchers, as the company will reveal its fourth quarter financial results Nov. 4. The announcement usually comes with a raft of company news, and will likely offer more details about the company’s restructuring. Qualcomm plans to lay off some 1,314 full-time San Diego employees on Nov. 20 after giving them 60 days’ notice.
Some San Diegans may remember Applied Micro, the company Rolland mentions as a possible Qualcomm acquisition target, as a Sorrento Mesa business called AMCC. The business moved its headquarters to Silicon Valley in 2005.
QUALCOMM INC.
CEO: Steve Mollenkopf
Revenue: $26.5 billion in fiscal 2014; $24.9 billion in fiscal 2013. Fiscal 2015 figures will be made public Nov. 4.
Net income: $7.97 billion in fiscal 2014; $6.85 billion in fiscal 2013. Fiscal 2015 figures will be made public Nov. 4.
No. of local employees: Roughly 15,000 full-time, part-time and temporary employees, as of September
Headquarters: Sorrento Mesa
Year founded: 1985
Stock symbol and exchange: QCOM on Nasdaq
Company description: Producer of telecommunications microchips and related technology
