QUALCOMM Incorporated — Q3 FY2013 Form 10-Q
Business context and reporting period. Unaudited results cover the 13 weeks ended June 30, 2013, compared with the 13 weeks ended June 24, 2012; nine-month comparisons are for the periods ended on those dates. Qualcomm designs and supplies wireless semiconductors and licenses its intellectual property. QCT sells chipsets and related products; QTL earns license fees and royalties. Figures below are in U.S. dollars.
Key financial metrics
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Revenue | $6.243 billion | $4.626 billion | $18.385 billion | $14.251 billion |
| Operating income | $1.677 billion | $1.382 billion | $5.642 billion | $4.448 billion |
| Net income attributable to Qualcomm | $1.580 billion | $1.207 billion | $5.352 billion | $4.838 billion |
| Diluted EPS | $0.90 | $0.69 | $3.04 | $2.78 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $6.268 billion | $4.589 billion |
Q3 revenue rose about 35% year over year, and nine-month revenue rose about 29%. Q3 net income attributable to Qualcomm increased about 31%; nine-month net income increased about 11%, with the prior-year period including $753 million from discontinued operations. Equipment and services revenue was $4.286 billion in Q3, up from $2.948 billion; licensing revenue was $1.957 billion, up from $1.678 billion.
Margins and segments. Cost of equipment and services revenue was 58% of that revenue in Q3 and 57% for the nine-month period, unchanged year over year in each comparison. Q3 operating margin was approximately 26.9%, versus 29.9% a year earlier. QCT revenue was $4.222 billion and segment earnings before tax were $738 million; QTL revenue was $1.867 billion and segment earnings before tax were $1.633 billion.
Cash, liquidity and debt. At June 30, 2013, cash and cash equivalents were $2.533 billion and marketable securities totaled $27.869 billion, or approximately $30.4 billion combined. Current assets were $15.972 billion and current liabilities $5.028 billion. The company reported total liabilities of $9.226 billion; the filing does not provide a clear figure for consolidated interest-bearing debt. Qualcomm guaranteed former Indian BWA subsidiaries’ loans totaling $484 million at quarter-end ($415 million due May 2014 and $69 million due December 2014). Operating cash flow for the nine months was $6.268 billion; capital expenditures were $808 million. The company repurchased $1.289 billion of stock and paid $1.463 billion in cash dividends during the period.
Material changes versus prior comparable periods
- QCT growth was the primary driver of higher equipment and services revenue. Qualcomm shipped approximately 172 million MSM integrated circuits in Q3, up from 141 million; nine-month shipments were 526 million versus 449 million.
- QTL revenue increased, primarily reflecting higher sales of CDMA-based devices by licensees.
- Research and development expense rose to $1.298 billion in Q3 from $974 million, largely due to investment in 3G/4G technologies, integrated circuits and intellectual property.
- Other operating expense included a $158 million impairment charge for QMT property, plant and equipment, following revised expected cash flows. This compares with a $7 million QRS goodwill impairment in Q3 FY2012.
- On June 25, 2013, Bharti increased its ownership in the BWA subsidiaries, which were consequently deconsolidated. Qualcomm recognized a $22 million gain; approximately $1.0 billion of assets and $999 million of liabilities were removed from the balance sheet. The transaction was noncash.
- Cash and marketable securities increased about $3.6 billion from September 30, 2012, while cash and cash equivalents alone declined from $3.807 billion to $2.533 billion.
Outlook, management commentary and risks
Management expects continued expansion of 3G and 3G/4G networks and sustained demand for advanced multimode devices, including smartphones and data-centric products. It expects lower-end smartphones to support growth in emerging regions and plans continued substantial investment in wireless technologies, products and services. The filing gives no numerical earnings or revenue guidance. Management states that current liquidity and expected operating cash flow should meet working-capital and other capital needs over the next fiscal year and beyond.
Key risks include dependence on wireless technology deployment and device sales; competition, pricing and product mix; concentration among QCT customers and QTL licensees; supply constraints and reliance on third-party manufacturers; and legal or regulatory challenges to Qualcomm’s licensing model and intellectual property. The company also cites foreign-exchange, investment-portfolio, cybersecurity, product, tax and geopolitical risks. More than 90% of revenue came from international customers during the first nine months of FY2013. Of $20.0 billion in cash, cash equivalents and marketable securities held by foreign subsidiaries, $19.8 billion was in jurisdictions where earnings were considered indefinitely reinvested and could incur material tax effects if repatriated.
Contingencies and unusual items. SEC and Department of Justice investigations include review of Foreign Corrupt Practices Act compliance; Qualcomm disclosed benefits to individuals associated with Chinese state-owned companies or agencies, estimated at less than $250,000 excluding employment compensation. The company is cooperating and cannot predict the outcome. Other proceedings include competition matters in Europe, Korea and Japan and patent litigation, including ParkerVision litigation scheduled for trial in October 2013. Apart from the MOSAID matter, Qualcomm had not accrued contingent losses for these proceedings because it did not consider losses probable; potential losses could not be reasonably estimated. Management warns that an unfavorable resolution could materially affect results or financial condition.
Purchase obligations at June 30 included approximately $2.9 billion for the remainder of FY2013 and $749 million for FY2014, including substantial integrated-circuit inventory commitments. The company stated it had no material off-balance-sheet arrangements. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether QCT shipment growth and QTL royalties continue, and how customer concentration, selling prices and product mix affect margins.
- Whether the $158 million QMT impairment signals further impairment risk or changes to the division’s licensing and commercialization plans.
- The timing and terms of Bharti’s planned acquisition steps, repayment of guaranteed loans, and remaining guarantee exposure.
- Developments and potential financial consequences from the SEC/DOJ investigations, competition proceedings and patent disputes.
- The accessibility and tax implications of foreign-held cash, alongside continued capital returns, R&D spending and inventory purchase commitments.