Business Context and Reporting Period
Company: QUALCOMM Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 29, 2009 (Second Quarter of Fiscal 2009)
Business Overview: QUALCOMM designs, manufactures, and markets digital wireless telecommunications products and services based on CDMA technology. Operations are conducted through four reportable segments: Qualcomm CDMA Technologies (QCT), Qualcomm Technology Licensing (QTL), Qualcomm Wireless & Internet (QWI), and Qualcomm Strategic Initiatives (QSI).
Key Financial Metrics
| Metric (in millions) | Three Months Ended Mar 29, 2009 |
Three Months Ended Mar 30, 2008 |
Six Months Ended Mar 29, 2009 |
Six Months Ended Mar 30, 2008 |
|---|---|---|---|---|
| Total Revenues | $2,455 | $2,606 | $4,972 | $5,047 |
| Net (Loss) Income | $(289) | $766 | $52 | $1,533 |
| Diluted EPS | $(0.18) | $0.47 | $0.03 | $0.93 |
| Operating Cash Flow | N/A | N/A | $4,764 | $1,827 |
| Cash & Equivalents | $3,892 | N/A | N/A | N/A |
| Total Assets | $24,084 | N/A | N/A | N/A |
| Total Liabilities | $6,971 | N/A | N/A | N/A |
Liquidity: Cash, cash equivalents, and marketable securities totaled $14.0 billion as of March 29, 2009. The company reported no long-term debt on the balance sheet.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 6% year-over-year for the quarter ($2.46B vs $2.61B) and 1% for the six-month period ($4.97B vs $5.05B).
- QCT (Equipment): Revenues dropped significantly due to a 19% decrease in Mobile Station Modem (MSM) integrated circuit shipments (69 million vs 85 million) driven by channel inventory contraction and the global financial crisis.
- QTL (Licensing): Revenues increased 18% year-over-year ($1.04B vs $881M) primarily due to payments received from Nokia and increased sales of WCDMA products by licensees.
- Net Loss: The company reported a net loss of $289 million for the quarter, compared to net income of $766 million in the prior year. This was primarily driven by a $748 million pre-tax litigation settlement charge related to an agreement with Broadcom Corporation.
- Investment Losses: Net investment income turned into a loss of $91 million for the quarter (vs $93 million income prior year) due to other-than-temporary impairment charges of $204 million on marketable securities caused by financial market disruptions.
- Operating Expenses: Excluding the litigation charge, operating expenses were generally flat or decreased due to cost containment, though R&D expenses increased by $51 million year-over-year to support next-generation technologies.
Guidance, Outlook, and Risks
- Outlook: Management expects the global financial crisis to continue causing lower demand for CDMA-based products. They anticipate a greater mix of lower-priced products for emerging markets in the second half of fiscal 2009.
- Investment Strategy: The company intends to continue investing heavily in R&D for 3G, OFDMA, and multimedia technologies. Capital expenditures for the first six months were $468 million.
- Dividends: The quarterly dividend was increased to $0.17 per share, effective for dividends payable after March 27, 2009.
- Stock Repurchases: Approximately $1.7 billion remained authorized for repurchase under the stock repurchase program. No shares were repurchased in the second quarter.
- Risks:
- Market Disruption: Continued volatility in credit and equity markets poses risks to the value of marketable securities (gross unrealized losses of $1.1 billion).
- Regulatory/Litigation: Ongoing investigations by the European Commission, Korea Fair Trade Commission, and Japan Fair Trade Commission regarding licensing practices.
- Customer Concentration: The four largest customers accounted for 49% of consolidated revenues in the first six months of fiscal 2009.
Investor Verification Checklist
- Settlement Impact: Verify the cash flow impact of the $891 million Broadcom settlement, of which $200 million is due in the quarter ending June 28, 2009.
- Inventory Levels: Monitor channel inventory levels and MSM shipment volumes, as the 19% decline in shipments was a primary driver of revenue weakness.
- Investment Portfolio: Assess the risk of further other-than-temporary impairment charges on the $10 billion+ marketable securities portfolio given the $1.1 billion in unrealized losses.
- Licensing Revenue: Confirm the sustainability of QTL revenue growth, which was bolstered by specific payments from Nokia and WCDMA adoption.
- Regulatory Status: Track the status of antitrust investigations in the EU, South Korea, and Japan, as adverse rulings could impact the licensing business model.