Business Context and Reporting Period
Company: QUALCOMM Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 28, 1998 (Third Quarter of Fiscal 1998)
Business Overview: QUALCOMM is a leading provider of digital wireless communications products, technologies, and services. Revenue is generated primarily through CDMA license fees and royalties, sales of CDMA subscriber and infrastructure equipment, ASIC component sales, OmniTRACS terminals and services, and contract development services (notably for the Globalstar satellite system).
Key Financial Metrics
| Metric | Three Months Ended June 28, 1998 |
Nine Months Ended June 28, 1998 |
Three Months Ended June 29, 1997 |
Nine Months Ended June 29, 1997 |
|---|---|---|---|---|
| Total Revenues | $875.5 million | $2,421.9 million | $520.3 million | $1,494.9 million |
| Net Income | $5.8 million | $68.6 million | $35.9 million | $61.8 million |
| Diluted EPS | $0.08 | $0.93 | $0.50 | $0.86 |
| Operating Income | $53.4 million | $157.5 million | $33.1 million | $61.6 million |
| Cash & Equivalents (Balance Sheet) |
$179.9 million | N/A (Balance Sheet Item) | ||
| Total Investments (Current + Non-Current) |
$230.1 million | N/A (Balance Sheet Item) | ||
| Net Cash Used by Operating Activities |
$(182.0 million) (9 Months) | $(87.5 million) (9 Months) | ||
| Long-Term Debt | $4.7 million | N/A (Balance Sheet Item) | ||
| Bank Lines of Credit (Current Liability) |
$138.0 million | N/A (Balance Sheet Item) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 68% year-over-year for the quarter and 62% for the nine-month period. This was driven by an 81% increase in Communications Systems revenue (CDMA equipment and ASICs) and a 29% increase in Contract Services (Globalstar development).
- Profitability Decline: Despite revenue growth, Net Income for the quarter dropped 84% to $5.8 million from $35.9 million. This was primarily due to a $20 million non-cash write-off of the investment in NextWave Telecom Inc. and increased minority interest charges.
- Cash Flow: Net cash used by operating activities increased to $182 million for the nine months ended June 28, 1998, compared to $87 million in the prior year. This was driven by a $430 million increase in net working capital requirements, specifically higher accounts receivable and inventories.
- Inventory Build-up: Inventories increased to $393.8 million from $225.2 million at the prior year-end, attributed to lower demand for the 1900 MHz PCS Q phone and re-work efforts on QCP phone models.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- NextWave Write-off: Recorded a $20 million charge to write off the investment in NextWave Telecom Inc. following its Chapter 11 bankruptcy filing.
- Royalty Accounting Change: Beginning in Q2 1998, the Company began accruing estimated royalty revenues earned in the current quarter, adding $18 million to Q2 revenue. This improves the timeliness of revenue recognition.
- Outlook & Strategy:
- Spin-off Proposal: The Company is considering spinning off its joint venture and equity interests in emerging wireless companies (e.g., Pegaso, Chilesat, QUALCOMMTel) into a new entity, "SpinCo," expected to be completed by the end of fiscal 1998.
- Capital Needs: The business is capital intensive. The Company may need to raise additional funds in the near term via debt or equity.
- Risks & Contingencies:
- Litigation: Ongoing patent infringement lawsuits with Ericsson (trial set for Dec 1998) and Motorola. An unfavorable outcome could materially affect operations.
- Customer Financing: Significant exposure to customer financing, including $71 million outstanding from Globalstar and commitments to extend up to $370 million in financing to other customers.
- Market Conditions: Reduced demand in South Korea and the U.S. for specific Q phone models impacted Q2 margins and inventory levels.
Investor Verification Checklist
- NextWave Exposure: Verify the final recovery value, if any, from the NextWave Telecom bankruptcy proceedings.
- Spin-off Details: Monitor the status of the proposed "SpinCo" transaction and the specific assets/liabilities to be transferred.
- Globalstar Financing: Assess the credit risk associated with the $71 million deferred payments from Globalstar and the $22.5 million guarantee.
- Inventory Turnover: Track the reduction of Q phone inventory and the impact of re-work programs on future gross margins.
- Litigation Outcomes: Review the results of the Ericsson and Motorola patent trials scheduled for late 1998.
- Working Capital: Monitor the trend in accounts receivable and inventory levels to ensure cash flow stabilizes.