QUALCOMM INC annual report, Q3 FY2001

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Business Context and Reporting Period

Company: QUALCOMM Incorporated
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2001 (53-week fiscal year)
Business Overview: QUALCOMM is a leading developer of CDMA-based wireless technology, operating through three primary segments: CDMA Technologies (QCT), Technology Licensing (QTL), and Wireless Systems (QWS). The company designs integrated circuits, licenses patents, and provides fleet management services.

Key Financial Metrics

Metric Fiscal 2001 Fiscal 2000
Total Revenues $2,679.8 million $3,196.8 million
Operating Income $6.9 million $722.6 million
Net (Loss) Income $(548.7) million $670.2 million
Diluted EPS $(0.73) $0.85
Cash & Equivalents $1,388.6 million $716.9 million
Total Assets $5,747.1 million $6,063.0 million
Stockholders' Equity $4,889.8 million $5,516.3 million

Segment Performance (Revenues):

  • QCT (CDMA Technologies): $1,364.7 million (up from $1,238.7 million)
  • QTL (Technology Licensing): $781.9 million (up from $705.5 million)
  • QWS (Wireless Systems): $407.7 million (down from $720.9 million)

Material Changes vs. Prior Period

The company reported a significant shift from profitability to a net loss of $548.7 million, driven by the following factors:

  • Asset Impairments: Recorded $549.8 million in asset impairment charges, primarily $519 million related to Globalstar L.P. assets and $32 million related to Vesper Companies (Brazil) receivables.
  • Investment Losses: Net investment expense of $256 million, compared to $494 million income in 2000. This included $243 million in unrealized losses on derivative instruments (Leap Wireless warrants) and $287 million in other-than-temporary losses on marketable securities.
  • Accounting Changes: Adoption of SAB 101 (Revenue Recognition) and FAS 133 (Derivatives) resulted in a net cumulative loss of $17.9 million. SAB 101 adoption decreased revenue by $40 million and increased pre-tax loss by $51 million.
  • Revenue Decline: Total revenues decreased 16% year-over-year. Excluding the sale of the consumer phone business in 2000, organic revenue decreased by $82 million, largely due to the accounting change and reduced Globalstar business.
  • Expense Increases: R&D expenses rose to $415 million (15% of revenue) from $340 million (11% of revenue) due to 3G and high-speed data initiatives.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

  • Management expects Globalstar-related revenues to be negligible in fiscal 2002.
  • The company plans to continue investing heavily in R&D for 3G standards (CDMA2000 1X/1xEV-DO) and high-speed wireless data.
  • Strategic investments in CDMA carriers (e.g., Vesper, Pegaso, Leap Wireless) remain a priority but carry high risk.
Key Risks & Contingencies:
  • Globalstar Restructuring: Globalstar suspended debt payments; QUALCOMM has fully reserved related assets ($636 million total charges in 2001).
  • Carrier Financing Defaults: Pegaso (Mexico) failed to meet covenants and make scheduled payments; interest accrual ceased. Vesper (Brazil) is undergoing restructuring with significant uncertainty.
  • Market Downturn: A global economic slowdown has negatively impacted wireless equipment manufacturers and network operators.
  • Technology Adoption: Revenue growth depends on the widespread adoption of 3G CDMA standards over competing technologies like GSM/WCDMA.
  • Legal Proceedings: Ongoing litigation includes patent infringement claims (GTE, Zoltar) and employment-related class actions (Schwartz, Durante).

Investor Verification Checklist

  • Globalstar Exposure: Verify the status of Globalstar's debt restructuring and the likelihood of any recovery on the $636 million in charges.
  • Carrier Solvency: Assess the financial health of key financed carriers, specifically Pegaso (Mexico) and Vesper (Brazil), and the recoverability of the $674 million and $418 million exposures, respectively.
  • Derivative Valuation: Review the fair value assumptions for the Leap Wireless warrant, which caused a $243 million unrealized loss.
  • 3G Deployment: Monitor the commercial rollout of CDMA2000 1X in the U.S. and South Korea to validate royalty revenue projections.
  • Customer Concentration: Note that three customers (Samsung, Kyocera, LG) accounted for 37% of consolidated revenues in 2001.