QUALCOMM Incorporated — FY2011 Form 10-K
Reporting period: Fiscal year ended September 25, 2011 (52 weeks). The filing also reports fourth-quarter results. Qualcomm develops wireless chipsets and software, licenses intellectual property, and provides related services. Its principal segments are QCT (chipsets), QTL (licensing), QWI (wireless and internet services), and QSI (strategic investments).
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $14.96 billion | $10.98 billion |
| Operating income | $5.03 billion | $3.73 billion |
| Net income attributable to Qualcomm | $4.26 billion | $3.25 billion |
| Diluted EPS | $2.52 | $1.96 |
| Operating margin | 33.6% | 33.9% |
| Cash from operations | $4.90 billion | $4.08 billion |
| Capital expenditures | $593 million | $426 million |
- Revenue rose 36%; net income attributable to Qualcomm rose 31%. Equipment and services revenue was $9.22 billion, while licensing revenue was $5.73 billion.
- Equipment and services gross margin declined to approximately 47% from 53%, reflecting QCT margin pressure and $137 million of Atheros acquisition-related inventory step-up and intangible amortization charges.
- Cash, cash equivalents, and marketable securities totaled $20.91 billion, up $2.51 billion year over year. Cash from operations less capital expenditures was approximately $4.31 billion.
- Balance-sheet loans payable were $994 million, related to Indian spectrum; capital lease obligations were $170 million. Stockholders’ equity was $26.97 billion.
- FY2011 dividends were $0.81 per share, totaling $1.35 billion. The quarterly dividend was increased to $0.215 per share.
- Fourth quarter: Revenue was $4.12 billion, operating income $1.24 billion, net income attributable to Qualcomm $1.06 billion, and diluted EPS $0.62.
Material changes versus prior year
- QCT revenue increased to $8.86 billion from $6.70 billion; MSM chipset shipments rose 21% to approximately 483 million. QCT operating margin fell to 23% from 25%, amid lower average selling prices, unfavorable mix, and higher support costs.
- QTL revenue increased to $5.42 billion from $3.66 billion. FY2011 included $401 million from settlements with two licensees, relating to prior quarters. QTL operating margin increased to 88% from 83%.
- Qualcomm acquired Atheros in May 2011 for $3.1 billion net of acquired cash, expanding QCT into Wi-Fi, networking, and connectivity products. Atheros contributed to higher goodwill and intangible assets.
- Qualcomm recorded a $114 million Firethorn goodwill impairment after SWAGG adoption fell short of expectations; QWI reported a $152 million pretax loss versus $12 million pretax income.
- FLO TV was shut down in March 2011 and presented as discontinued operations. Net loss from discontinued operations was $313 million, versus $273 million in FY2010. Restructuring and related charges were $358 million.
Outlook, commentary, risks, and contingencies
- Management expected continued growth in demand for 3G and multimode 3G/4G devices, smartphones, tablets, and lower-cost devices in emerging markets. It planned continued substantial investment in chipsets, LTE, software, and display technology. The filing provides no formal numerical revenue or earnings guidance.
- FY2012 capital expenditures were expected to exceed FY2011, including more than $600 million for the Taiwan display manufacturing facility. Management also cited $1.9 billion of FY2012 purchase obligations.
- Qualcomm agreed to sell substantially all of its U.S. 700 MHz spectrum to AT&T for $1.9 billion, subject to FCC approval and other conditions. Management expected a $1.2 billion gain if the sale closed; approval remained pending and the agreement could expire.
- India’s Department of Telecommunications rejected Qualcomm’s applications for licenses related to spectrum purchased for $1.1 billion. Litigation and regulatory processes continued; the company warned it might not receive the license or spectrum assignment, or recover the payment. Related loans carried a 10% floating rate and could be accelerated under specified default conditions; lenders had granted conditional waivers through at least April 1, 2012.
- Major business risks include dependence on continued CDMA/OFDMA deployment, intense chipset competition, customer and licensee concentration, supply-chain capacity, foreign-exchange exposure, and challenges to Qualcomm’s licensing practices. Two customers each represented approximately 13% of FY2011 revenue; Samsung and HTC were significant customers/licensees. International customers and licensees generated 94% of revenue.
- Patent and competition matters included proceedings in the United States, Europe, Korea, and Japan, as well as an ongoing SEC investigation. Qualcomm recorded no accrual for the described contingent legal liabilities, stating losses were not considered probable and a range could not be reasonably estimated.
- Of $20.91 billion in cash and marketable securities, $15.2 billion was held by foreign subsidiaries; $13.5 billion of foreign-held funds could have material tax effects if repatriated. The company had not recorded approximately $4.7 billion of deferred tax liability on those indefinitely reinvested earnings.
Important facts for investors to verify
- Whether the AT&T spectrum sale received FCC approval, closed, and produced the anticipated proceeds and gain.
- Resolution of the Indian spectrum licensing dispute, the recoverability of the spectrum payment, and the status of related loans and waivers.
- Whether QCT shipment growth can offset pricing and mix pressure and support margins following the Atheros acquisition.
- Durability of QTL royalty growth, including the impact of prior-period settlements and ongoing licensing disputes.
- Progress on FLO TV contract exits and restructuring cash costs, and commercial adoption and funding needs of the Taiwan display facility.
- Developments in material intellectual-property, antitrust, and SEC proceedings, for which the filing does not provide a reasonably estimable loss range.