QUALCOMM Incorporated — Q1 FY2010 10-Q
Business context and period. The quarter comprised 13 weeks and ended December 27, 2009; comparisons are with the 13 weeks ended December 28, 2008. QUALCOMM develops wireless chipsets and software and licenses its intellectual property. Its principal segments are Qualcomm CDMA Technologies (QCT), Qualcomm Technology Licensing (QTL), Qualcomm Wireless & Internet (QWI) and Qualcomm Strategic Initiatives (QSI). The interim financial statements are unaudited.
Key financial results
| Metric | Q1 FY2010 | Q1 FY2009 |
|---|---|---|
| Total revenue | $2.670 billion | $2.517 billion |
| Operating income | $879 million | $745 million |
| Net income | $841 million | $341 million |
| Diluted EPS | $0.50 | $0.20 |
| Operating cash flow | $1.239 billion | $3.501 billion |
| Capital expenditures | $88 million | $234 million |
| Dividends announced per share | $0.17 | $0.16 |
Revenue grew 6% and operating income 18%; net income more than doubled, reflecting a major improvement in investment results as well as stronger operating performance. Net investment income was $173 million versus a $294 million loss, including $102 million of net realized securities gains and $57 million of impairment losses. The prior-year quarter included $392 million of net impairment losses.
- Revenue mix: Equipment and services revenue rose to $1.663 billion from $1.423 billion; licensing and royalty revenue fell to $1.007 billion from $1.094 billion.
- Margins and segments: Equipment and services cost was 49% of related revenue, versus 53% a year earlier. QCT revenue was $1.608 billion and segment EBT $425 million, up from $1.334 billion and $168 million; QCT operating margin was 26% versus 13%. QTL revenue was $917 million and EBT $772 million, down from $1.006 billion and $874 million; its operating margin was 85% versus 87%. QWI revenue declined to $142 million from $170 million. QSI recorded a $107 million pretax loss, versus $98 million.
- Liquidity and balance sheet: Cash and cash equivalents were $3.660 billion and marketable securities totaled $15.268 billion at quarter end, or approximately $18.9 billion combined. Total assets were $28.903 billion; current assets $13.574 billion and current liabilities $2.948 billion. Total liabilities were $7.550 billion. The filing does not provide a clear total for conventional borrowings; it reports $199 million in present-value capital lease obligations.
- Cash flow: Cash rose by $943 million to $3.660 billion. The operating cash flow decline largely reflected the prior-year collection of a $2.5 billion Nokia-related receivable, rather than a comparable deterioration in current-period operations.
Material changes and notable items
- QCT shipped approximately 92 million MSM integrated circuits, up 46% from approximately 63 million. CDMA-based device shipments were estimated at 133 million, up 6%, while average selling price declined about 13% to approximately $184.
- QCT revenue increased primarily on higher chipset shipments; QTL revenue was lower, principally reflecting lower average selling prices of CDMA-based products. QTL’s current-quarter revenue included $71 million attributable to fiscal 2009 under a newly signed license agreement.
- QUALCOMM entered a Samsung license agreement covering specified wireless technologies through December 31, 2023. Consideration includes $1.3 billion in non-refundable lump-sum payments due in installments, ongoing royalties and patents recorded at an estimated $136 million.
- At December 27, 2009, the company held $8.6 billion of cash and securities domestically and $10.3 billion through foreign subsidiaries. Management said current liquidity and expected operating cash flow should meet working and other capital needs over the next fiscal year and beyond.
- The company announced $284 million of dividends during the quarter and paid $284 million. It made no share repurchases in the quarter; approximately $1.7 billion remained authorized.
Outlook, risks and contingencies
- Outlook: Management expects continuing growth in demand for 3G products and services, including smartphones and connected computing devices, and identifies network expansion in China and potential growth in India as opportunities. It expects subdued recovery in developed markets and strength in lower-priced devices to continue pressuring average selling prices for the remainder of FY2010. The filing provides no numerical revenue or earnings guidance in the supplied text.
- Investment and spending: Management expects substantial continuing R&D investment. FLO TV had $1.3 billion in segment assets and a $107 million quarterly pretax loss; its direct-to-consumer service began in November 2009. Management discussed a possible future FLO TV spin-off as one potential exit strategy, not a committed transaction.
- Legal and regulatory: The Korea Fair Trade Commission imposed a 273.2 billion won fine, recorded as a $232 million liability, and ordered changes to certain practices; QUALCOMM plans to appeal and expected to pay in Q2 FY2010. The Japan Fair Trade Commission issued a cease-and-desist order that QUALCOMM contests. Panasonic disputed WCDMA royalties, and the company deferred recognition of related revenue. The European Commission closed its proceedings after complainants withdrew. A Tessera ITC order remains in effect, but QUALCOMM said it shifted U.S. supply of affected chips to a licensed supplier; the patents expire in September 2010.
- Other obligations and tax: Management reported a $1.4 billion U.S. tax payment expected in Q1 FY2011 related to Nokia agreement assets, and $605 million remaining payable to Broadcom through April 2013. Estimated FY2010 effective tax rate was approximately 21%; the federal R&D credit expired December 31, 2009. Approximately $9.0 billion of foreign subsidiary earnings were considered indefinitely reinvested; the related unrecorded deferred tax liability exceeded $3.0 billion.
- Principal risks: Reliance on a limited number of customers and licensees; pricing and competition pressures; dependence on third-party chip manufacturing capacity; continued challenges to the licensing model and intellectual property; exposure to financial-market and investment losses; and the uncertain adoption and returns of FLO TV, OFDMA/LTE and IMOD initiatives. Approximately 66% of first-quarter revenue came from customers and licensees based in South Korea, China and Taiwan; the three largest customers accounted for 38% of consolidated revenue.
Important facts for investors to verify
- Whether chipset shipment growth can offset lower device selling prices and softer licensing and royalty revenue.
- How much of the increase in reported earnings is sustainable operating performance versus volatile investment gains and reduced impairment charges.
- Timing and cash effects of the KFTC fine, Nokia-related tax payment, Broadcom settlement payments and unresolved Panasonic royalty dispute.
- Customer concentration, supplier capacity and legal or regulatory outcomes affecting QUALCOMM’s licensing model and product sales.
- FLO TV’s operating losses, consumer adoption and prospects for monetizing its substantial asset base; also the performance and impairment risk of the company’s investment portfolio.