QUALCOMM Incorporated — Q3 FY2011 Form 10-Q
Reporting period: Three and nine months ended June 26, 2011; comparable periods ended June 27, 2010. Amounts are in U.S. dollars unless noted. Interim financial statements are unaudited.
Business context
QUALCOMM develops wireless technologies and sells chipsets and related products (QCT), licenses its intellectual property and collects royalties (QTL), and operates other wireless businesses and strategic investments. The quarter reflected the May 24 acquisition of Atheros, integrated into QCT. FLO TV results were reclassified as discontinued operations.
Financial performance
| Metric | Q3 FY2011 | Q3 FY2010 | First nine months FY2011 | First nine months FY2010 |
|---|---|---|---|---|
| Total revenue | $3.623B | $2.700B | $10.840B | $8.030B |
| Operating income | $1.113B | $893M | $3.789B | $2.770B |
| Income from continuing operations | $985M | $832M | $3.501B | $2.582B |
| Net income attributable to QUALCOMM | $1.035B | $767M | $3.204B | $2.382B |
| Diluted EPS | $0.61 | $0.47 | $1.90 | $1.43 |
| Operating margin | 30.7% | 33.1% | 35.0% | 34.5% |
Q3 revenue increased 34%; equipment and services revenue was $2.297B and licensing and royalty revenue was $1.326B. QCT shipped approximately 120 million MSM integrated circuits, up 17% year over year. Reported device sales by licensees were approximately $36.4B, up 44%. For the first nine months, operating cash flow was $3.080B, compared with $2.983B a year earlier; capital expenditures were $400M.
Q3 equipment-and-services cost was 56% of that revenue, versus 48% a year earlier, reflecting lower QCT gross margin and $59M of Atheros-related inventory step-up and intangible amortization charges. Q3 QCT pretax earnings were $430M (24% higher year over year), while QTL pretax earnings were $1.092B (up from $673M). QTL revenue growth included higher licensee device sales and royalties; nine-month QTL revenue also included $401M recognized from settlements of disputes for prior quarters.
Balance sheet and liquidity
- At June 26, 2011, cash and cash equivalents were $5.746B and marketable securities totaled $14.475B, or approximately $20.2B combined. The company reported $5.6B held domestically and $14.6B held by foreign subsidiaries.
- Total assets were $35.1B; current assets were $12.833B and current liabilities were $4.464B. Total liabilities were $8.799B and stockholders’ equity was $26.301B.
- Loans payable were $1.092B, classified as current, and relate to Indian spectrum financing. The rupee-denominated loans bear a floating rate (9.75% at June 26), are due in December 2012, and lenders may demand repayment on December 15, 2011 subject to notice. Capital lease obligations had a carrying value of $185M.
- Cash and cash equivalents increased by $2.199B over the nine-month period. Cash from operations of $3.080B and $2.392B of employee-plan stock issuance proceeds were partly offset by the $3.130B net cash acquisition of Atheros and $985M of dividends paid. No shares were repurchased during the period.
Material changes, outlook and risks
- Atheros acquisition: Net cash consideration was $3.1B, with $1.779B of goodwill recognized. Acquired operating results since the acquisition date were not material to the quarter. Management cited expansion into networking and other markets as a strategic objective.
- FLO TV and spectrum sale: FLO TV service shut down March 27, 2011. The company agreed to sell substantially all its 700 MHz spectrum for $1.9B, subject to customary conditions including FCC approval. Management expected a $1.2B gain in discontinued operations if the sale closes. Future restructuring charges were estimated at up to $40M, with cash expenditures of $100M–$140M expected.
- Firethorn impairment: A $114M goodwill impairment was recorded after adoption of its SWAGG application fell significantly below expectations; the filing reports $120M of total Firethorn impairment charges for the first nine months.
- Management outlook: The company expected continued growth in 3G and 3G/4G devices, smartphones, tablets and emerging markets, while continuing substantial R&D investment. It expected fiscal 2011 R&D spending to remain significant and capital expenditures to exceed fiscal 2010 levels, excluding the prior-year India spectrum payment. The filing does not provide a specific revenue or EPS forecast in the supplied text.
- Key risks and contingencies: Exposure includes competition and technology transitions, reliance on a limited number of major chipset customers and licensees, third-party manufacturing capacity, royalty disputes and changing regulatory or intellectual-property rules. Disclosed litigation includes patent cases and competition proceedings in Korea and Japan; the company reported no accrual for the described legal contingencies because losses were not considered probable and ranges could not be reasonably estimated. An SEC investigation remained ongoing; an internal review found no financial statement errors. A 20% adverse currency move could add an estimated $273M to principal and $39M to interest on the India loans through their contractual terms.
Disclosure controls were reported effective at quarter-end, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether and when the $1.9B 700 MHz spectrum sale receives required approvals and closes, and whether the expected $1.2B gain is realized.
- How Atheros integration, acquired goodwill and intangible assets, and ongoing acquisition-related charges affect QCT margins and returns.
- Whether QCT gross margin stabilizes amid pricing, product-mix and competition pressures, and whether QTL growth is sustained after the prior-period dispute settlements.
- Developments in the disclosed patent, competition and SEC matters, including any changes to expected financial exposure.
- Availability and geographic accessibility of liquidity, and the timing, interest and foreign-exchange exposure of the India loans.