QUALCOMM Incorporated — Q1 FY2014 Form 10-Q
Reporting period: Three months ended December 29, 2013 (13 weeks), compared with the three months ended December 30, 2012. Figures are unaudited and in U.S. dollars.
Business context
Qualcomm earns revenue primarily from chipset and related product sales (QCT) and licensing fees and royalties (QTL). It shipped approximately 213 million MSM integrated circuits, up 17% year over year. Reported sales of licensed 3G/4G devices were approximately $61.6 billion, up about 16%. The company completed the sale of substantially all of Omnitracs’ North and Latin America operations.
Financial results
| Metric | Q1 FY2014 | Prior-year quarter |
|---|---|---|
| Revenue | $6.622 billion | $6.018 billion |
| Operating income | $1.493 billion | $2.088 billion |
| Income from continuing operations | $1.444 billion | $1.903 billion |
| Net income attributable to Qualcomm | $1.875 billion | $1.906 billion |
| Diluted EPS, continuing operations | $0.84 | $1.09 |
| Diluted EPS, total | $1.09 | $1.09 |
| Operating cash flow | $2.781 billion | $1.975 billion |
| Capital expenditures | $210 million | $205 million |
- Revenue increased 10%: equipment and services revenue rose to $4.653 billion from $4.199 billion, while licensing revenue increased to $1.969 billion from $1.819 billion.
- Operating income fell about 29%, primarily reflecting $472 million in other expense, including a $444 million QMT facility impairment, a $16 million QRS goodwill impairment and a $12 million ParkerVision-related charge. Research and development expense rose to $1.328 billion from $1.106 billion.
- Equipment and services cost was 58% of related revenue, versus 53% a year earlier; management cited lower QCT margin percentage, reflecting product mix, average selling prices and unit costs.
- Net income included a $430 million after-tax gain from the Omnitracs sale. The sale generated $788 million net cash proceeds and a $665 million pretax gain.
- Operating cash flow less capital expenditures was approximately $2.571 billion, compared with $1.770 billion in the prior-year quarter.
Segments and balance sheet
- QCT: Revenue was $4.616 billion versus $4.120 billion; segment earnings before tax were $906 million versus $1.068 billion. Segment EBT margin was 20%, down from 26%.
- QTL: Revenue was $1.900 billion versus $1.757 billion; segment EBT was $1.670 billion versus $1.532 billion. Segment EBT margin was 88%, versus 87%.
- At December 29, 2013, cash and cash equivalents were $8.292 billion and marketable securities totaled $23.318 billion, for combined cash, cash equivalents and marketable securities of approximately $31.6 billion. Total assets were $46.282 billion, total liabilities $9.255 billion and stockholders’ equity $37.027 billion.
- The balance sheet does not list borrowings; capital lease obligations had a present value of $14 million. Cash, cash equivalents and marketable securities held by foreign entities totaled $22.9 billion, of which $22.7 billion was indefinitely reinvested and could incur material tax effects if repatriated.
- Qualcomm repurchased $1.0 billion of shares and paid $590 million in dividends during the quarter. The announced dividend was $0.35 per share.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management expected continued growth in 3G/4G devices, strong demand for advanced devices, and opportunities from China’s LTE-TDD licensing. It also anticipated ongoing pricing pressure and continued substantial R&D investment.
- Qualcomm stated that it expected to repurchase at least $3 billion of stock during the remainder of FY2014 and intended to return 75% of free cash flow to stockholders through repurchases and dividends over the foreseeable future. It expected current liquidity and operating cash flow to cover requirements for at least 12 months; additional borrowing could be considered in future years.
- Key risks include competition and falling chipset prices, reliance on a limited number of customers and licensees, third-party manufacturing and supply constraints, challenges to licensing practices and intellectual-property rights, regulatory actions, and demand or economic shifts.
- Legal and regulatory matters include a Chinese NDRC antimonopoly investigation begun in November 2013; SEC and DOJ investigations concerning FCPA compliance; patent and competition proceedings in several jurisdictions; and ParkerVision post-verdict motions following a jury award of approximately $173 million in past damages. The company stated that outcomes of investigations and litigation are uncertain and that possible losses generally could not be reasonably estimated. It had accrued amounts for ParkerVision.
- Management estimated a fiscal 2014 annual effective tax rate of approximately 18%. It said several tax audits might be resolved within 12 months; the related unrecognized tax benefit liability was $233 million.
Most important facts for investors to verify
- Underlying operating and EPS trends excluding the Omnitracs disposal gain and the QMT, QRS and ParkerVision-related charges.
- Whether QCT margins stabilize as product mix, pricing and unit costs change, and whether QTL royalty growth continues.
- Liquidity available for domestic needs given the substantial foreign-held, indefinitely reinvested balance.
- Progress and potential financial effects of the NDRC, SEC/DOJ, ParkerVision and other legal or regulatory matters.
- Execution of the stated share-repurchase and 75%-of-free-cash-flow capital-return plans, alongside planned R&D, acquisitions and strategic investments.