QUALCOMM INC annual report, FY2010

QUALCOMM Incorporated — Fiscal 2010 Form 10-K

Reporting period: Fiscal year ended September 26, 2010 (52 weeks). The filing is an annual report, not a standalone “2010 Q4” filing; fourth-quarter figures are summarized separately below. Dollar amounts are in U.S. dollars.

Business context and reporting period

Qualcomm earns revenue primarily from sales of wireless integrated circuits and from licensing its intellectual property and collecting royalties. Its principal segments are Qualcomm CDMA Technologies (QCT), Qualcomm Technology Licensing (QTL), Qualcomm Wireless & Internet (QWI), and Qualcomm Strategic Initiatives (QSI). Fiscal 2010 benefited from a recovery in chipset demand and higher shipment volumes, alongside continued growth in wireless data and 3G devices.

Financial performance

Metric	FY2010	FY2009
Revenue	$10.991 billion	$10.416 billion
Operating income	$3.283 billion	$2.226 billion
Net income	$3.247 billion	$1.592 billion
Diluted EPS	$1.96	$0.95
Net cash from operating activities	$4.076 billion	$7.172 billion
Cash, cash equivalents and marketable securities	$18.402 billion	$17.742 billion

Revenue rose 5.5%; operating income rose 47% and net income more than doubled. Consolidated operating margin was approximately 29.9%, versus 21.4%; the comparison is affected by FY2009’s $783 million Broadcom settlement charge and $230 million KFTC fine.
Equipment and services revenue was $6.980 billion, up from $6.466 billion; licensing and royalty revenue was $4.011 billion, up from $3.950 billion. Equipment and services cost was 50% of that revenue, compared with 49% in FY2009.
QCT revenue increased to $6.695 billion from $6.135 billion. Qualcomm shipped approximately 399 million MSM integrated circuits, up 26%. QCT operating margin was 25%, versus 23%.
QTL revenue increased to $3.659 billion from $3.605 billion; its operating margin was 83%, versus 85%. QWI revenue declined to $628 million from $641 million and its operating margin was 1%. QSI reported a $436 million pretax loss, compared with a $361 million loss.
R&D expense was $2.549 billion, or 23% of revenue, versus $2.440 billion. SG&A was $1.642 billion, also 15% of revenue, versus $1.556 billion.
Net investment income was $751 million, compared with a $150 million loss in FY2009, reflecting higher realized gains and substantially lower investment impairment losses. This materially contributed to the increase in pretax income.
Operating cash flow fell 43%, primarily because FY2009 included collection of a $2.5 billion Nokia-related receivable. Capital expenditures were $426 million; the company also paid $1.064 billion toward Indian spectrum.
At year-end, current assets were $12.133 billion and current liabilities $5.468 billion. The balance sheet included a $1.086 billion short-term bank loan and $221 million of capital lease obligations. Cash and securities totaled $18.402 billion; $12.1 billion was held by foreign subsidiaries and $6.3 billion domestically.
Qualcomm repurchased about 79.8 million shares for $3.0 billion and paid $1.177 billion in dividends. The annual dividend announced per share increased to $0.72 from $0.66.

Fourth quarter: Revenue was $2.952 billion, operating income $837 million, and net income $865 million; diluted EPS was $0.53. In Q4 FY2009, revenue was $2.690 billion, operating income $597 million, net income $803 million, and diluted EPS $0.48.

Material changes versus the prior comparable period

FY2010 revenue recovered from FY2009’s decline, driven principally by QCT shipment growth; QCT revenue rose about 9%.
FY2010 earnings benefited from the absence of FY2009’s Broadcom settlement and KFTC fine, and from the swing in investment results from a $150 million loss to $751 million of income.
QTL revenue was broadly stable, while its margin eased; QWI revenue and earnings declined, and QSI losses widened as FLO TV continued to incur losses.
Cash from operations was substantially lower than FY2009 due to the unusually large prior-year Nokia receivable collection, not simply a decline in reported net income.
Qualcomm acquired 20 MHz of Broadband Wireless Access spectrum in four Indian telecom circles for approximately $1.1 billion, financed initially with a short-term rupee-denominated bank loan.

Outlook, risks, contingencies and unusual items

Management expected continued growth in 3G and multimode 3G/4G devices, smartphones and emerging-market 3G adoption, with ongoing investment in CDMA, LTE, chipsets, software and display technology. The filing does not provide a clear numerical revenue or EPS forecast.
Management expected FY2011 capital expenditures, excluding FY2010’s spectrum payment, to be more than three times FY2010’s level, primarily due to a planned display-manufacturing facility. FY2011 purchase obligations were $1.4 billion.
Qualcomm had begun restructuring FLO TV and expected to exit its current service business. It forecast FY2011 restructuring charges of $125 million to $175 million and cash expenditures of $160 million to $210 million, in addition to ongoing costs; further impairment or other charges remained possible. FLO TV assets were approximately $1.3 billion.
Qualcomm expected to pay approximately $1.4 billion to U.S. tax authorities in FY2011 related to the 2008 Nokia agreements. It also expected to repay the $1.1 billion Indian-rupee loan in the first quarter of FY2011 and intended to refinance a substantial portion. The loan carried a 6.75% fixed rate.
The remaining Broadcom settlement obligation was $475 million, including imputed interest, payable through April 2013; $173 million was due in FY2011. FY2009 included the original $783 million charge.
Approximately 95% of FY2010 revenue came from international customers and licensees. China, South Korea, Taiwan and Japan represented 29%, 27%, 12% and 9% of revenue, respectively. Two customers each exceeded 10% of revenue and together accounted for approximately 25%.
Key risks include dependence on a limited number of chipset customers and royalty licensees, intense competition and price pressure, execution and supply-chain constraints, and whether LTE and other technologies generate expected licensing returns. The filing also highlights exposure to investment-market volatility, foreign exchange, tax and spectrum regulation, and possible intellectual-property challenges.
Material legal matters included the KFTC fine and appeal, a stayed Japanese JFTC order under administrative review, an EU complaint by Icera, and Panasonic’s royalty arbitration. An October 15, 2010 interim order found no breach of the Panasonic license agreement, but other claims remained unresolved; Qualcomm had deferred recognition of related royalties. The SEC had an ongoing investigation; the company reported that its internal review found no financial-statement errors. Qualcomm had not accrued losses for the described contingencies because it considered them not probable and could not reasonably estimate a loss range.
Management reported effective disclosure controls and internal control over financial reporting; the independent auditor gave unqualified opinions on the financial statements and internal control.

Most important facts for investors to verify

Whether QCT shipment growth can continue despite lower average selling prices, customer concentration and competitive pressure.
Whether QTL royalty revenue and licensing terms withstand ongoing disputes and regulatory challenges, particularly the Panasonic arbitration and competition-authority matters.
The final cost, asset recoverability and strategic outcome of the FLO TV exit, including any impairment charges.
Cash availability and funding plans for FY2011 tax payments, the Indian spectrum loan, increased capital spending and contractual commitments; note the substantial foreign-held cash balance.
How much of FY2010’s earnings improvement is sustainable operating performance versus the recovery in investment gains and the absence of prior-year exceptional charges.
Progress on assigning and deploying the Indian spectrum, meeting build-out requirements, and attracting operator partners for LTE.