QUALCOMM Incorporated — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2012, ended March 25, 2012. The statements are unaudited; the comparable periods ended March 27, 2011.
Business context and results
QUALCOMM develops wireless integrated circuits and software, licenses its intellectual property, and provides wireless-related services. Its main segments are QCT (chipsets), QTL (technology licensing), QWI (wireless and internet services), and QSI (strategic initiatives). Second-quarter results reflected strong chipset growth and the sale of substantially all 700 MHz spectrum; the spectrum gain is reported in discontinued operations.
Key financial metrics
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Total revenue | $4.943B | $3.870B | $9.625B | $7.217B |
| Operating income | $1.514B | $1.430B | $3.066B | $2.676B |
| Income from continuing operations | $1.438B | $1.264B | $2.838B | $2.515B |
| Net income attributable to QUALCOMM | $2.230B | $0.999B | $3.631B | $2.168B |
| Diluted EPS | $1.28 | $0.59 | $2.10 | $1.30 |
| Operating cash flow | Not separately stated | Not separately stated | $3.667B | $1.816B |
Q2 equipment and services revenue was $3.137B, up from $2.039B; licensing revenue was $1.806B, compared with $1.831B. For the first six months, equipment and services revenue rose to $6.305B from $4.252B, and licensing revenue increased to $3.320B from $2.965B. Q2 shipments were 152 million MSM integrated circuits, up 29% year over year; reported licensee device sales were approximately $51.7B, up 29%.
Q2 cost of equipment and services revenue was 57% of that revenue, versus 52% a year earlier, implying a corresponding gross margin of approximately 43% versus 48%. For the six-month periods, the cost ratio was 56% versus 49%. Management attributed the margin pressure mainly to lower QCT gross margin, including lower average selling prices, product mix, and product support costs. Consolidated operating margin was approximately 30.6% in Q2 versus 37.0% a year earlier.
Six-month investing cash flow was a net use of $3.573B, including $635M of capital expenditures and $1.925B in spectrum-sale proceeds. Financing cash flow provided $447M, including $729M of dividends paid. Cash and cash equivalents increased $536M to $5.998B. Cash, cash equivalents, and marketable securities totaled approximately $26.6B at quarter-end. Loans payable were $1.039B, principally Indian-rupee borrowings due December 18, 2012, bearing a stated rate of 10.75% at quarter-end. Current assets were $17.861B and current liabilities $5.178B.
Changes versus comparable periods
- Q2 revenue increased 28%; QCT revenue rose to $3.059B from $1.962B, supported by higher unit shipments and connectivity-product sales, including Atheros-related contributions.
- QTL revenue was slightly lower in Q2, partly because the prior-year quarter included $401M from settlements with two licensees. On a six-month basis, QTL revenue increased, principally with higher licensee device sales and average royalties per unit.
- Q2 net income included $761M after tax from discontinued operations, versus a $269M loss in the prior-year quarter. The current-period result primarily reflects the spectrum-sale gain; continuing-operations income provides a clearer comparison of ongoing performance.
- Six-month operating cash flow more than doubled, with management noting that the prior-year period included a $1.5B payment to U.S. tax authorities.
- At March 25, total assets were $41.531B, compared with $36.422B at September 25, 2011; total stockholders’ equity rose to $31.870B from $26.972B.
Outlook, commentary, risks, and unusual items
- Outlook: The filing provides no clear numerical revenue or earnings guidance. Management expected continued growth in 3G and 3G/4G devices, including smartphones and data-centric products, and ongoing transition to 3G networks. It also expected 28-nanometer chipset demand to exceed supply and anticipated continued supply constraints.
- Investment and spending: Management expected significant ongoing R&D investment. Fiscal 2012 capital expenditures were expected to exceed fiscal 2011, including more than $600M for the Taiwan QMT manufacturing facility, expected to be operational in fiscal 2013. Purchase obligations for the remainder of fiscal 2012 were approximately $2.0B.
- Capital returns: The company authorized a new $4.0B share-repurchase program; approximately $3.5B remained available at quarter-end, net of put options. The quarterly dividend was raised from $0.215 to $0.25 per share, effective for subsequent payments.
- Spectrum and debt: QUALCOMM sold substantially all 700 MHz spectrum for $1.9B and recognized a $1.2B pretax gain in discontinued operations. In India, a subsidiary paid $81M in disputed shareholder dues to obtain a wireless license; assignment of the spectrum remained pending. The company had $1.0B of related loans due December 2012, with lender waivers effective at least through June 1, 2012. Failure to obtain spectrum assignment could put the spectrum investment at risk.
- Legal and regulatory: Matters disclosed include patent litigation, competition-authority proceedings in Korea and Japan, an EU preliminary investigation, and SEC and DOJ inquiries concerning FCPA compliance. Management said it believed it was compliant and would cooperate. Except for the CSIRO-related amount, the company recorded no accrual for the described contingencies, stating that additional liabilities were not considered probable and potential losses could not be reasonably estimated.
- Other items: The company established QCT’s non-U.S. headquarters in Singapore and obtained tax incentives subject to employment and investment criteria. Management estimated the Singapore tax incentive would avoid approximately $265M of tax in fiscal 2012 compared with having no incentive. The federal R&D tax credit expired December 31, 2011; the estimated fiscal 2012 effective tax rate was approximately 18%.
- Liquidity considerations: $16.5B of cash, cash equivalents, and marketable securities was held by foreign subsidiaries; $15.2B was treated as indefinitely reinvested and would be subject to material tax effects if repatriated. Management said available liquidity and expected operating cash flow should meet requirements under current plans.
Important facts for investors to verify
- Separate ongoing earnings from the $761M after-tax discontinued-operations contribution, and review the tax and accounting treatment of the spectrum sale.
- Track QCT supply availability, 28-nanometer production, shipment growth, and gross-margin trends.
- Monitor the India spectrum-assignment application, loan maturity, and status of lender waivers.
- Assess the effect of foreign-held funds and potential repatriation taxes on usable domestic liquidity.
- Follow the disclosed litigation, competition reviews, and SEC/DOJ FCPA inquiries; the filing does not provide a reasonably estimable range of potential losses.
- Review progress and spending on the Taiwan QMT facility, as well as execution and returns from acquisitions and strategic investments.