QUALCOMM Incorporated — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the second quarter and six months of fiscal 2013, ended March 31, 2013; comparable prior-year periods ended March 25, 2012. Each quarter comprised 13 weeks. Qualcomm’s principal businesses are QCT (chipsets and software) and QTL (patent licensing), alongside QWI and QSI.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Revenue | $6.124 billion | $4.943 billion | $12.143 billion | $9.625 billion |
| Operating income | $1.877 billion | $1.514 billion | $3.966 billion | $3.066 billion |
| Income from continuing operations | $1.863 billion | $1.438 billion | $3.766 billion | $2.838 billion |
| Net income attributable to Qualcomm | $1.866 billion | $2.230 billion | $3.772 billion | $3.631 billion |
| Diluted EPS | $1.06 | $1.28 | $2.15 | $2.10 |
Prior-year net income and EPS include discontinued-operation income of $761 million for the quarter and $756 million for the six months; continuing-operations results are more comparable. Revenue grew 24% in Q2 and 26% for the six months. Q2 operating margin was about 30.6%, approximately flat year over year. Cost of equipment and services was 59% of related revenue versus 57% in Q2 FY2012.
Q2 equipment and services revenue rose to $3.990 billion from $3.137 billion; licensing revenue rose to $2.134 billion from $1.806 billion. QCT Q2 revenue was $3.916 billion and pretax segment earnings were $681 million (17% of revenue); QTL revenue was $2.057 billion and pretax segment earnings were $1.803 billion (88%). Qualcomm shipped about 173 million MSM integrated circuits, up 14%, and reported licensee device sales of about $61.1 billion, up 18%.
Cash, liquidity and capital
Six-month operating cash flow was $4.191 billion, versus $3.667 billion. Capital expenditures were $494 million, implying operating cash flow less capital expenditures of approximately $3.697 billion. Cash and cash equivalents were $4.093 billion; marketable securities were $26.446 billion, for combined cash and securities of about $30.5 billion, up $3.7 billion since September 30, 2012. Qualcomm reported no material off-balance-sheet arrangements.
Total liabilities were $9.971 billion and stockholders’ equity was $37.628 billion at March 31, 2013. The principal disclosed debt was $1.1 billion of Indian BWA subsidiary loans and debentures, classified as held for sale and guaranteed by Qualcomm and a subsidiary. The loans and debentures are rupee-denominated; some debentures could be subject to holder redemption rights in June 2013.
Six-month dividends paid were $859 million and stock repurchases were $250 million. A new $5 billion repurchase authorization was announced, with the full amount still available at quarter-end. Qualcomm announced a 40% quarterly dividend increase, from $0.25 to $0.35 per share, effective for payments after March 27, 2013.
Changes, outlook and risks
- QCT growth reflected higher unit shipments and product mix, while normal price declines and unfavorable mix reduced QCT gross margin. QCT inventory increased 17% during Q2 to $1.44 billion.
- QTL growth primarily reflected higher sales of CDMA-based devices by licensees. QTL expenses increased faster than revenue, partly due to patent expenses and research and development following a corporate reorganization.
- Management expected continued adoption of 3G and 3G/4G devices, expansion of LTE, and strong demand for advanced devices, while noting price competition and regional differences. The filing provides no numerical revenue or earnings guidance.
- Management estimated a 16% FY2013 effective tax rate, versus 19% for FY2012, reflecting foreign earnings and reinstatement of the U.S. R&D tax credit; a $64 million benefit related to FY2012 was recorded in Q2.
- Qualcomm highlighted licensing challenges, competition, customer and licensee concentration, dependence on third-party chip suppliers, pricing and product-mix pressure, and technology deployment risks. International sales exceeded 90% of revenue for the first six months.
- Contingencies include patent and competition matters and SEC/DOJ investigations, including an FCPA investigation concerning benefits provided to individuals associated with Chinese state-owned entities or agencies. Qualcomm said the known benefits were valued below $250,000, excluding employment compensation; outcomes and potential losses were not estimable. MicroUnity settled in April 2013 for a license and an amount described as not material. Other notable cases remained pending.
Important facts for investors to verify
- Whether shipment growth and product mix can offset continued chipset price declines and QCT margin pressure.
- Whether licensing revenue growth and licensee device sales persist, given ongoing challenges to Qualcomm’s licensing model.
- The status and potential financial or business effects of the SEC/DOJ investigations and material litigation.
- Progress on the planned transfer of the Indian BWA subsidiaries to Bharti, including the related $1.1 billion debt, redemption provisions, and spectrum build-out obligations.
- Availability and practical use of foreign-held cash: $18.8 billion was held in jurisdictions where undistributed earnings were indefinitely reinvested and would incur material tax effects if repatriated.