QUALCOMM Incorporated — Form 10-Q Summary
Business context and reporting period. This unaudited filing covers the second quarter and first six months of fiscal 2010, ended March 28, 2010; each period comprised 13 and 26 weeks, respectively. Qualcomm earns revenue primarily from wireless chipset and related product sales (QCT) and intellectual-property licenses and royalties (QTL), alongside smaller services and strategic-investment businesses.
Financial results and liquidity
Amounts in millions of dollars, except per-share data.
| Metric | Q2 FY2010 | Q2 FY2009 | Six months FY2010 | Six months FY2009 |
|---|---|---|---|---|
| Revenue | $2,663 | $2,455 | $5,333 | $4,972 |
| Operating income (loss) | $776 | ($10) | $1,655 | $735 |
| Net income (loss) | $774 | ($289) | $1,615 | $52 |
| Diluted EPS | $0.46 | ($0.18) | $0.96 | $0.03 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $2,032 | $4,764 |
- Quarterly revenue increased about 8%; six-month revenue rose about 7%. Q2 equipment and services revenue was $1,595, while licensing and royalty revenue was $1,068.
- Equipment and services gross margin was approximately 49% in Q2, versus 48% a year earlier; for the six months it was 50%, versus 47%. Reported operating results also reflect the absence of the prior-year $748 Broadcom settlement charge.
- Investment income was $189 in Q2, compared with a $91 loss a year earlier; six-month investment income was $361, versus a $385 loss. Lower impairments and realized investment gains drove much of the change.
- Cash, cash equivalents and marketable securities totaled $18.2 billion at March 28, up $471 from fiscal year-end. Current assets were $12.652 billion and current liabilities $3.330 billion. The filing reports no material off-balance-sheet arrangements and shows no conventional borrowings on the balance sheet; present value of capital lease obligations was $208.
- Six-month operating cash flow fell to $2.032 billion from $4.764 billion, principally because the prior-year period included collection of a $2.5 billion Nokia-related receivable. Capital expenditures were $196; investing cash use was $427 and financing cash use was $1.764 billion.
- During the six months, Qualcomm repurchased $1.715 billion of shares and paid $563 in dividends. The quarterly dividend was increased from $0.17 to $0.19 per share for payments after March 28. A new $3.0 billion repurchase authorization was available in full at quarter-end.
Material changes and segment performance
- QCT: Q2 revenue was $1.537 billion, up from $1.316 billion; pretax earnings rose to $344 from $217. Qualcomm shipped about 93 million MSM chips, up from 69 million. For six months, QCT revenue increased to $3.144 billion from $2.650 billion.
- QTL: Q2 revenue was $974, up from $954, while pretax earnings were $821 versus $839. Six-month revenue was $1.891 billion versus $1.961 billion. Lower royalties per device, including underreported royalties from a licensee, and Panasonic-related revenue deferrals weighed on results; a $71 million prior-period revenue item was recognized in the six-month period.
- QWI: Q2 revenue declined to $152 from $176, largely after development work under the QChat-Sprint licensing agreement ceased. Six-month revenue fell to $294 from $346.
- QSI: Q2 revenue was $2 versus $8, and pretax loss widened to $136 from $102, principally due to higher FLO TV losses. Six-month pretax loss was $243 versus $200.
- Two QCT/QTL customers together represented approximately 27% of six-month revenue; the four largest customers represented 45%. More than 90% of revenue came from international customers.
Outlook, risks, contingencies and unusual items
- Management expects continued worldwide 3G expansion and demand for smartphones, data devices and lower-cost 3G products. It also anticipates continued pricing pressure, particularly in lower-end devices, and plans substantial investment in wireless chips, CDMA/4G technologies, software and services. The filing provides no specific revenue or earnings guidance.
- Management said existing cash, securities and expected operating cash flow should meet working and other capital needs over the next fiscal year and beyond. Fiscal 2010 capital expenditures were expected to be below fiscal 2009 levels, though a successful bid for Indian broadband wireless spectrum could add spending.
- Qualcomm expected to pay approximately $1.4 billion to U.S. tax authorities in the first quarter of fiscal 2011, related to cash and intangible assets received under the 2008 Nokia agreements. The company also disclosed $899 million in purchase obligations for the remainder of fiscal 2010 and $174 million for fiscal 2011.
- The Broadcom settlement requires total payments of $891 million; $329 million had been paid through quarter-end. The recorded liability was $534 million, while management described $562 million as the remaining contractual payments through April 2013.
- Legal matters include Qualcomm’s appeal of a Korean Fair Trade Commission ruling and fine, which was accrued in fiscal 2009 and paid in Q2; a Japanese cease-and-desist order stayed pending an administrative hearing; and a Tessera ITC order being appealed. Qualcomm said licensed supply arrangements were enabling continued U.S. shipments of affected chips. In the Panasonic arbitration, Qualcomm deferred recognition of certain WCDMA royalties. For the described proceedings, the company generally recorded no further accrual, citing that potential losses were not considered probable or could not be reasonably estimated.
- Key risks include licensing and patent disputes, customer and geographic concentration, competition and device-price pressure, reliance on third-party chip suppliers, market and investment volatility, and uncertain adoption and returns from FLO TV, IMOD displays and other strategic initiatives. Management also cited foreign-exchange and credit-market exposure.
- Reported earnings comparisons are affected by unusual items: the prior-year Broadcom settlement charge and substantially higher prior-year investment impairment losses. Fiscal 2010 investment results included realized gains, while Panasonic-related royalty revenue was deferred.
Important facts for investors to verify
- Whether QCT shipment growth and improved chipset margins persist as average selling prices, product mix and competition evolve.
- How much of QTL royalty pressure reflects lower royalties per device, the identified underreporting, and deferred Panasonic royalties—and the outcome of the arbitration.
- Timing and funding of the approximately $1.4 billion fiscal 2011 tax payment, alongside Broadcom settlement installments and other purchase commitments.
- Developments in the KFTC, JFTC, Tessera and other licensing or patent matters, including any financial or operating effects.
- FLO TV losses and strategic investment returns, and whether planned spectrum or technology investments require additional capital.
- The quality and liquidity of the $18.2 billion cash-and-securities position, including exposure to investment impairments and the substantial foreign-held balance.