QUALCOMM Incorporated — FY2012 Form 10-K
Business context and reporting period. Qualcomm designs and supplies wireless chipsets and software (QCT), licenses its intellectual property (QTL), and operates smaller services and strategic-investment businesses. Fiscal 2012 ended September 30, 2012 and included 53 weeks, versus 52 weeks in fiscal 2011; the filing cautions that results are not exactly comparable. The filing also reports fourth-quarter results.
Key financial results
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $19.121 billion | $14.957 billion |
| Operating income | $5.682 billion | $5.026 billion |
| Income from continuing operations | $5.283 billion | $4.555 billion |
| Net income attributable to Qualcomm | $6.109 billion | $4.260 billion |
| Diluted EPS | $3.51 | $2.52 |
| Cash from operating activities | $5.998 billion | $4.900 billion |
- Revenue increased 28%; equipment and services revenue rose to $12.465 billion from $9.223 billion, and licensing revenue rose to $6.656 billion from $5.734 billion.
- Operating margin was approximately 29.7%, versus 33.6%; equipment-and-services gross margin was approximately 43%, versus 47%. Lower QCT gross margin reflected pricing, product mix and higher product-support costs.
- Net income included $776 million after tax from discontinued operations, chiefly the $1.2 billion pretax gain on the sale of substantially all 700 MHz spectrum. Continuing-operations income is a better indicator of ongoing earnings.
- QCT revenue was $12.141 billion and QTL revenue was $6.327 billion. QCT shipped approximately 590 million MSM integrated circuits, up 22% from 483 million.
- Cash, cash equivalents and marketable securities totaled $26.837 billion at year-end, including $17.0 billion held by foreign subsidiaries. Operating cash flow was $5.998 billion; capital expenditures were $1.284 billion.
- Loans and debentures associated with India BWA spectrum totaled about $1.064 billion and were classified as held for sale. The company had $33.545 billion in stockholders’ equity. It paid $1.583 billion in dividends and repurchased $1.313 billion of shares in FY2012.
Fourth-quarter results and changes
FY2012 fourth-quarter revenue was $4.871 billion, compared with $4.117 billion in the prior-year quarter. Operating income was $1.235 billion, versus $1.238 billion; income from continuing operations was $1.240 billion, versus $1.055 billion; and net income attributable to Qualcomm was $1.271 billion, versus $1.056 billion. Fourth-quarter net income included $23 million from discontinued operations, net of tax. The fiscal-year comparison is affected by the additional week in FY2012.
- QCT revenue grew substantially with higher shipments, connectivity-product sales and product-mix effects; segment pretax margin declined to 19% from 23%.
- QTL revenue increased to $6.327 billion from $5.422 billion, with segment pretax margin remaining 88%. Higher licensee device sales and average royalties per unit contributed to growth.
- Research and development spending rose to $3.915 billion from $2.995 billion. The company continued heavy investment in CDMA, LTE and other technologies.
- Accounts receivable rose 47%; days sales outstanding increased to 29 days from 22, mainly due to business growth and shipment/payment timing.
Outlook, risks and unusual items
- Management expected continued growth in 3G and multimode 3G/4G devices and a strong QCT first quarter of FY2013 as 28-nanometer supply improved and new devices launched. It warned that 28-nanometer supply constraints could persist into early FY2013. No numerical earnings or revenue guidance is provided here.
- The company expects significant ongoing R&D and reported $3.1 billion of purchase obligations due in FY2013, including commitments for integrated-circuit inventory.
- Qualcomm said current cash, securities and expected operating cash flow should meet working and other capital needs. It intended to refinance $545 million of India-related loans due December 18, 2012; these loans carried rates of 10.00%–10.50%. Related debentures were approximately $519 million, with a 10.25% rate at year-end and potential holder redemption rights in June 2013.
- Key exposures include dependence on a small number of customers/licensees and Asian markets, intense chipset competition, third-party manufacturing capacity, changing device prices, and disputes over patent licensing. China, South Korea and Taiwan represented 42%, 22% and 14% of FY2012 revenue, respectively.
- Legal and regulatory matters include patent litigation, competition-authority proceedings in Japan and Korea, and SEC/DOJ investigations that included FCPA compliance. Qualcomm disclosed benefits to individuals associated with Chinese state-owned entities or agencies with an estimated value below $250,000, excluding employment compensation; outcomes remain uncertain. No accrual was recorded for the described contingent litigation losses because management did not consider them probable or reasonably estimable.
- Other unusual items included $81 million paid to the Indian government for the BWA spectrum license, a $54 million QMT equipment impairment, and $23 million of Firethorn goodwill impairment. QMT had $1.2 billion of assets, including $136 million of goodwill, and management shifted its plan toward licensing IMOD technology.
Important facts for investors to verify
- Separate recurring continuing-operations performance from the spectrum-sale gain and other nonrecurring items; confirm the treatment of discontinued operations.
- Review QCT margin trends, 28-nanometer supply availability and the effects of product mix and pricing on profitability.
- Assess customer and geographic concentration, including the contribution of major device makers and Asian markets.
- Track refinancing and repayment of India BWA-related debt, the planned transfer of BWA subsidiaries to Bharti, and related currency and regulatory risks.
- Monitor developments in the SEC/DOJ investigations, patent disputes and competition-authority proceedings, as well as any resulting financial or licensing impact.