QCOM

Business Context and Reporting Period

Company: QUALCOMM Incorporated
Filing Type: Form 10-K (Annual Report)
Period Ended: September 29, 2002 (Fiscal Year 2002)
Business Overview: QUALCOMM is a leading developer of CDMA (Code Division Multiple Access) technology. The company generates revenue through licensing its intellectual property to manufacturers, selling CDMA-based integrated circuits (chips) and system software, and providing wireless business solutions (fleet tracking) and software services (BREW platform). The company operates through four primary segments: QUALCOMM CDMA Technologies (QCT), QUALCOMM Technology Licensing (QTL), QUALCOMM Wireless & Internet (QWI), and QUALCOMM Strategic Initiatives (QSI).

Key Financial Metrics

Note: Fiscal 2001 results were significantly impacted by asset impairment charges related to Globalstar and accounting changes. Fiscal 2002 includes the consolidation of Vésper Holding (Brazil) starting November 2001.

Material Changes vs. Prior Period

• Profitability Recovery: The company returned to profitability in 2002 with $359.7 million in net income, compared to a $578.1 million net loss in 2001. This turnaround was driven by a reduction in asset impairment charges (from $518 million in 2001 to less than $1 million in 2002) and increased operating income.
• Revenue Growth: Total revenues increased 13.4% to $3.04 billion. Growth was fueled by a 16.6% increase in equipment and services revenue (driven by higher shipments of 3G CDMA2000 1X chips) and an 8.3% increase in licensing and royalty fees.
• Segment Performance:
  • QCT (Chips): Revenues rose to $1.59 billion (52% of total), with operating margins improving to 28% from 22% due to a shift toward higher-end 3G devices.
  • QTL (Licensing): Revenues increased to $847 million, maintaining a high operating margin of 89%.
  • QSI (Strategic Initiatives): This segment reported a loss of $507 million in 2002, primarily due to the consolidation of Vésper Holding losses and other-than-temporary losses on Leap Wireless investments. This compares to a $1.13 billion loss in 2001, which included massive Globalstar impairment charges.
• Investment Losses: The company recorded $230 million in other-than-temporary losses on marketable and private securities in 2002, primarily related to Leap Wireless ($180 million) and other strategic investments.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management expects continued growth dependent on the commercial deployment of 3G CDMA2000 1X and 1xEV-DO technologies. The company anticipates Vésper Holding will require approximately $60–$70 million in cash funding during the first six months of fiscal 2003.
• Unusual Items:
  • Globalstar: In 2001, the company recorded $519 million in asset impairment charges related to Globalstar. In 2002, Globalstar filed for Chapter 11 bankruptcy, and QUALCOMM does not anticipate receiving contractual amounts due.
  • Leap Wireless: Significant losses were recorded in 2002 due to declines in the value of Leap Wireless notes and stock, deemed other-than-temporary.
  • Vésper Holding: The consolidation of this Brazilian carrier resulted in operating losses and negative cash flows, though it contributed $126 million in revenue in 2002.
• Risks:
  • Customer Concentration: Three major customers (Samsung, Kyocera, LG Electronics) accounted for 41% of consolidated revenues in 2002.
  • Technology Adoption: Future growth relies on the widespread adoption of CDMA-based 3G standards over competing technologies like GSM/WCDMA.
  • Strategic Investments: Significant exposure to early-stage CDMA carriers (e.g., Vésper, Inquam, Pegaso) which face financial challenges and may require additional funding or result in write-downs.
  • Legal Proceedings: Ongoing litigation includes patent disputes (GTE, Zoltar) and employee class actions (Schwartz, Durante), though the company believes these claims are without merit.

Key Facts for Investor Verification

• Customer Concentration: Verify the stability of relationships with top three customers (Samsung, Kyocera, LG), which represent over 40% of revenue.
• Strategic Investment Valuation: Assess the recoverability of investments in Vésper Holding (Brazil), Inquam (India), and Pegaso (Mexico), particularly given the losses reported in the QSI segment.
• 3G Deployment Rates: Monitor the commercial success and subscriber growth of CDMA2000 1X and 1xEV-DO networks in key markets (South Korea, Japan, North America, China).
• Globalstar Exposure: Confirm that no further material liabilities exist regarding the Globalstar bankruptcy and that receivables are fully reserved.
• Goodwill Accounting: Note that the company will adopt FAS 142 in fiscal 2003, eliminating goodwill amortization (previously $248 million in 2002), which will impact future earnings comparisons.