QUALCOMM Incorporated — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2009, ended June 28, 2009; comparable periods ended June 29, 2008. Amounts are in U.S. dollars.
Business context
QUALCOMM develops and supplies wireless integrated circuits and software, licenses intellectual property and earns royalties, and operates wireless services and strategic investment businesses. Its principal segments are QCT (chipsets), QTL (licensing and royalties), QWI (wireless and internet services), and QSI (strategic initiatives). The filing describes a weak global economy, lower CDMA device prices, and continued investment in 3G and other wireless technologies.
Key financial results
| Metric | Three months ended June 28, 2009 | Year-over-year change | Nine months ended June 28, 2009 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $2.753 billion | Down 0.3% | $7.726 billion | Down 1.0% |
| Operating income | $894 million | Up 8.5% | $1.630 billion | Down 31.9% |
| Net income | $737 million | Down 1.5% | $790 million | Down 65.4% |
| Diluted EPS | $0.44 | Versus $0.45 | $0.47 | Versus $1.38 |
| Operating margin | 32.5% | Versus 29.8% | 21.1% | Versus 30.7% |
| Net margin | 26.8% | Versus 27.1% | 10.2% | Versus 29.2% |
Quarterly equipment and services revenue was $1.862 billion and licensing and royalty revenue was $891 million. Nine-month amounts were $4.698 billion and $3.028 billion, respectively. For the first nine months, QCT revenue declined to $4.436 billion from $4.956 billion, while QTL revenue rose to $2.769 billion from $2.248 billion. The QCT decline chiefly reflected lower shipments amid contraction in CDMA channel inventory; QTL growth reflected Nokia-related licensing and stronger WCDMA royalties.
Equipment and services cost was 46% of that revenue in the quarter, improving from 48%; for the nine months it was 50%, worsening from 47%. R&D expense rose to $618 million for the quarter and $1.826 billion for nine months. Nine-month results included a $748 million Broadcom litigation settlement charge and $717 million of net investment impairment losses; the prior-year nine-month periods included neither the settlement charge nor comparable impairment losses of that scale. The nine-month effective tax rate was 41%, versus 16%, and management estimated a 33% fiscal 2009 annual rate.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $5.851 billion, versus $2.567 billion. Management attributed the increase mainly to collection of a $2.5 billion Nokia-related receivable.
- Investing cash flow was a use of $3.027 billion; financing cash flow was a use of $938 million. Cash and cash equivalents increased $1.881 billion to $3.721 billion.
- At June 28, cash, cash equivalents and marketable securities totaled approximately $15.7 billion. Current assets were $11.731 billion and current liabilities $2.372 billion; the current ratio was approximately 4.9.
- Total liabilities were $7.002 billion and stockholders’ equity $18.711 billion. The balance sheet does not show a conventional borrowings line; capital lease obligations had a present value of $171 million. Interest expense was $16 million for the nine-month period.
- Nine-month dividends paid were $810 million; share repurchases were $285 million. About $1.7 billion remained authorized under the repurchase program. The quarterly dividend was raised to $0.17 per share.
- Cash and securities included $7.0 billion held domestically and $8.7 billion held by foreign subsidiaries. Management said available liquidity, expected operating cash flow and untapped debt capacity should meet needs over the next fiscal year and beyond.
Material developments, outlook and risks
- In the quarter, QUALCOMM shipped approximately 94 million MSM integrated circuits, up 9% year over year. CDMA-based device shipments were approximately 111 million, up 4%, while estimated average selling price fell about 15% to $191.
- Management expected economic uncertainty to continue affecting demand and investment values, while anticipating continued longer-term growth in 3G demand. It planned significant ongoing R&D investment. The filing provides no specific numeric revenue or earnings guidance.
- Broadcom settlement: QUALCOMM agreed to pay $891 million under a settlement and patent-license agreement, recorded a $748 million pretax charge, and paid $200 million in the quarter. The note reports a $650 million remaining liability at June 28; MD&A separately refers to $691 million of remaining payments, so the difference between carrying value and scheduled payments merits reconciliation.
- Litigation and regulation remain material uncertainties. QUALCOMM anticipated a substantial South Korean KFTC fine that could materially affect results, but could not estimate a reasonable range. A European Commission investigation remained active. In the Tessera matter, an ITC order restricted imports and certain U.S. activities involving accused chip packages; QUALCOMM said it had shifted U.S. supply to a licensed supplier and was appealing.
- Investment portfolio risk remained significant: nine-month impairment losses were $717 million, and gross unrealized losses on marketable securities were $449 million. Management judged remaining declines not other-than-temporary, but warned that market conditions could cause future impairment or realized losses.
- Other exposures include customer and geographic concentration, competition and pricing pressure, reliance on third-party chip manufacturing, technology adoption and execution risk, foreign exchange and tax uncertainty, and potential product, intellectual-property and regulatory claims.
Most important facts for investors to verify
- Reconcile the $650 million recorded Broadcom settlement liability with the $691 million of remaining payments cited in MD&A.
- Track the KFTC decision, any fine or required business-practice changes, and the status of the European Commission investigation and Tessera appeal.
- Assess whether the large investment impairment charges and $449 million of unrealized losses lead to further earnings or liquidity effects.
- Monitor QCT shipment recovery, device pricing, channel inventories, and whether QTL royalty growth continues to offset chipset weakness.
- Evaluate cash-flow quality: the nine-month operating cash flow increase relied substantially on collection of the Nokia-related receivable.
- Review the full filing and subsequent disclosures for updated guidance, contingencies, and developments after June 28, 2009.