QCOM

Business Context and Reporting Period

Company: QUALCOMM Incorporated
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2001 (53-week fiscal year)
Business Overview: QUALCOMM is a leading developer of CDMA-based wireless technology, operating through three primary segments: CDMA Technologies (QCT), Technology Licensing (QTL), and Wireless Systems (QWS). The company designs integrated circuits, licenses patents, and provides fleet management services.

Key Financial Metrics

Segment Performance (Revenues):

• QCT (CDMA Technologies): $1,364.7 million (up from $1,238.7 million)
• QTL (Technology Licensing): $781.9 million (up from $705.5 million)
• QWS (Wireless Systems): $407.7 million (down from $720.9 million)

Material Changes vs. Prior Period

The company reported a significant shift from profitability to a net loss of $548.7 million, driven by the following factors:

• Asset Impairments: Recorded $549.8 million in asset impairment charges, primarily $519 million related to Globalstar L.P. assets and $32 million related to Vesper Companies (Brazil) receivables.
• Investment Losses: Net investment expense of $256 million, compared to $494 million income in 2000. This included $243 million in unrealized losses on derivative instruments (Leap Wireless warrants) and $287 million in other-than-temporary losses on marketable securities.
• Accounting Changes: Adoption of SAB 101 (Revenue Recognition) and FAS 133 (Derivatives) resulted in a net cumulative loss of $17.9 million. SAB 101 adoption decreased revenue by $40 million and increased pre-tax loss by $51 million.
• Revenue Decline: Total revenues decreased 16% year-over-year. Excluding the sale of the consumer phone business in 2000, organic revenue decreased by $82 million, largely due to the accounting change and reduced Globalstar business.
• Expense Increases: R&D expenses rose to $415 million (15% of revenue) from $340 million (11% of revenue) due to 3G and high-speed data initiatives.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Management expects Globalstar-related revenues to be negligible in fiscal 2002.
• The company plans to continue investing heavily in R&D for 3G standards (CDMA2000 1X/1xEV-DO) and high-speed wireless data.
• Strategic investments in CDMA carriers (e.g., Vesper, Pegaso, Leap Wireless) remain a priority but carry high risk.

• Globalstar Restructuring: Globalstar suspended debt payments; QUALCOMM has fully reserved related assets ($636 million total charges in 2001).
• Carrier Financing Defaults: Pegaso (Mexico) failed to meet covenants and make scheduled payments; interest accrual ceased. Vesper (Brazil) is undergoing restructuring with significant uncertainty.
• Market Downturn: A global economic slowdown has negatively impacted wireless equipment manufacturers and network operators.
• Technology Adoption: Revenue growth depends on the widespread adoption of 3G CDMA standards over competing technologies like GSM/WCDMA.
• Legal Proceedings: Ongoing litigation includes patent infringement claims (GTE, Zoltar) and employment-related class actions (Schwartz, Durante).

Investor Verification Checklist

• Globalstar Exposure: Verify the status of Globalstar's debt restructuring and the likelihood of any recovery on the $636 million in charges.
• Carrier Solvency: Assess the financial health of key financed carriers, specifically Pegaso (Mexico) and Vesper (Brazil), and the recoverability of the $674 million and $418 million exposures, respectively.
• Derivative Valuation: Review the fair value assumptions for the Leap Wireless warrant, which caused a $243 million unrealized loss.
• 3G Deployment: Monitor the commercial rollout of CDMA2000 1X in the U.S. and South Korea to validate royalty revenue projections.
• Customer Concentration: Note that three customers (Samsung, Kyocera, LG) accounted for 37% of consolidated revenues in 2001.