QUALCOMM Incorporated — FY2013 Form 10-K
Reporting period: Fiscal year ended September 29, 2013 (52 weeks). The prior fiscal year ended September 30, 2012 and included 53 weeks, which limits direct comparability. The filing also reports fourth-quarter results.
Business context
Qualcomm develops and supplies wireless integrated circuits and system software, and licenses intellectual property used in wireless products. Its principal segments are QCT (chipsets) and QTL (technology licensing); together they generated about 97% of FY2013 revenue. QCT revenue is driven largely by device shipments, while QTL royalties generally depend on licensees’ reported sales of licensed devices.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Total revenue | $24.866 billion | $19.121 billion |
| Operating income | $7.230 billion | $5.682 billion |
| Net income attributable to Qualcomm | $6.853 billion | $6.109 billion |
| Diluted EPS | $3.91 | $3.51 |
| Operating cash flow | $8.778 billion | $5.998 billion |
| Capital expenditures | $1.048 billion | $1.284 billion |
- Revenue increased 30%; operating income increased 27%; net income attributable to Qualcomm increased 12%. Continuing-operations income rose from $5.283 billion to $6.845 billion. FY2012 net income also included a $776 million after-tax gain from discontinued operations, principally the sale of 700 MHz spectrum.
- FY2013 operating margin was approximately 29.1% (calculated). Cost of equipment and services was 58% of related revenue, versus 57% in FY2012; management attributed the deterioration primarily to lower QCT gross margin.
- QCT revenue rose to $16.715 billion from $12.141 billion; QTL revenue rose to $7.554 billion from $6.327 billion. QCT shipped approximately 716 million MSM integrated circuits, up 21% from 590 million. QCT EBT margin was 19%, unchanged; QTL EBT was $6.590 billion, with an 87% EBT margin versus 88%.
- Fourth-quarter revenue was $6.480 billion, operating income $1.588 billion, net income attributable to Qualcomm $1.501 billion, and diluted EPS $0.86.
- Cash, cash equivalents and marketable securities totaled $29.406 billion, versus $26.837 billion. Current assets were $19.555 billion and current liabilities $5.213 billion (current ratio approximately 3.75, calculated). The balance sheet reported no loans or debentures at year-end; capital lease obligations were $17 million.
- Cash flow from operations less capital expenditures was approximately $7.730 billion (calculated). Qualcomm repurchased $4.610 billion of stock and paid $2.055 billion in dividends. It expected to repurchase at least $4 billion of stock in FY2014.
- Of cash and marketable securities, $21.3 billion was held by foreign subsidiaries, and approximately $21.2 billion was considered indefinitely reinvested. The filing estimates about $7.6 billion of potential U.S. federal, state and foreign withholding taxes if approximately $21.6 billion of undistributed foreign earnings were repatriated.
Material changes, outlook and significant items
- Equipment and services revenue increased $4.523 billion and licensing revenue increased $1.222 billion. QCT growth reflected higher shipments and product mix, partly offset by lower average selling prices and declining gross margin percentage.
- Research and development spending rose to $4.967 billion from $3.915 billion, approximately 20% of revenue in both years, as Qualcomm expanded investment in 3G/4G, LTE and other technologies.
- Other expenses included a $173 million ParkerVision patent verdict charge and a $158 million impairment charge for QMT long-lived assets. Qualcomm intended to appeal the verdict; the jury had also found infringement not willful. Further proceedings, including ParkerVision’s request for ongoing equitable relief, remained pending.
- Qualcomm agreed to sell Omnitracs’ North and Latin American operations for $800 million in cash, subject to closing conditions and regulatory approvals, with closing expected in the first quarter of FY2014. The company expected to report the gain, net of taxes, as discontinued operations upon closing.
- Management expected continued transition from 2G to 3G/4G, demand for advanced devices, and growth in low-tier smartphones, particularly in emerging markets. It also expected continued investment in R&D and strategic opportunities. The filing provides no specific numerical revenue or earnings guidance.
- Key risks include intense chipset competition and pricing pressure; reliance on a limited number of customers and licensees; dependence on third-party manufacturing suppliers; disputes over patent royalties and FRAND licensing; regulatory and antitrust matters; foreign exchange and tax exposure; and uncertain returns on technology investments. China, South Korea and Taiwan accounted for 49%, 20% and 11% of revenue, respectively; two companies’ products accounted for 43% of consolidated revenue in FY2013, as described in the filing.
- SEC and DOJ investigations concerning FCPA compliance remained ongoing. Qualcomm disclosed that certain benefits, including special hiring consideration, gifts or other benefits, had been provided to individuals associated with Chinese state-owned entities; it estimated their aggregate monetary value at less than $250,000, excluding employment compensation. The outcome and potential loss were not estimable.
- Other pending matters included competition investigations or proceedings in Europe, South Korea and Japan, and the Tessera patent case. Apart from the ParkerVision charge, Qualcomm said it had not accrued losses for the described matters because losses were not considered probable or reasonably estimable.
Important facts for investors to verify
- Whether QCT shipment growth and product mix can offset continuing average-selling-price and gross-margin pressure.
- Whether QTL royalties remain resilient amid licensee concentration, patent disputes, regulatory scrutiny and the growth of single-mode LTE products.
- Closing, proceeds and final accounting for the Omnitracs sale, and the status of the ParkerVision appeal and other legal proceedings.
- How much foreign-held liquidity is practically available for U.S. uses after tax, and whether the planned FY2014 repurchases and dividend are supported by cash generation.
- Whether customer concentration, receivables growth, inventory levels and third-party manufacturing capacity create material operating or cash-flow risk.