QUALCOMM Incorporated — Q1 FY2011 10-Q
Business context and reporting period. The unaudited quarter ended December 26, 2010 and included 13 weeks; comparisons are with the 13 weeks ended December 27, 2009. Qualcomm’s principal businesses are chipset sales (QCT), intellectual-property licensing and royalties (QTL), wireless services (QWI), and strategic investments (QSI). Results are interim and are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q1 FY2011 | Q1 FY2010 / prior date |
|---|---|---|
| Revenue | $3.348 billion | $2.670 billion; up 25% |
| Operating income | $1.110 billion | $879 million; up 26% |
| Net income | $1.170 billion | $841 million; up 39% |
| Diluted EPS | $0.71 | $0.50 |
| Operating margin | 33.2% (approx.) | 32.9% (approx.) |
| Equipment and services gross margin | 49% | 51% |
| Operating cash flow | $48 million | $1.239 billion |
| Cash, cash equivalents and marketable securities | $19.1 billion | $18.4 billion at September 26, 2010 |
Equipment and services revenue was $2.213 billion, versus $1.663 billion; licensing and royalty revenue was $1.135 billion, versus $1.007 billion. The lower equipment/services gross margin reflected lower QCT gross margin and FLO TV restructuring costs. Cash from operations fell sharply, principally because Qualcomm paid $1.5 billion to U.S. tax authorities during the quarter.
At December 26, 2010, total assets were $31.291 billion, total liabilities $8.555 billion, and stockholders’ equity $22.736 billion. Current assets were $12.331 billion and current liabilities $3.943 billion. Loans payable were $1.089 billion, classified as current; the India-related loans carry a variable rate and may be subject to lender demand for prepayment in December 2011. The balance sheet also included a $416 million Broadcom settlement liability.
Qualcomm paid $309 million in dividends during the quarter and announced a further $0.19-per-share dividend payable in March 2011. No shares were repurchased in the quarter; approximately $1.7 billion remained authorized under the repurchase program.
Material changes and segment results
- QCT revenue rose to $2.116 billion from $1.608 billion, principally on higher shipments: approximately 118 million MSM integrated circuits versus 92 million. QCT pretax earnings increased to $640 million from $425 million; its operating margin was 30%, compared with 26%.
- QTL revenue increased to $1.057 billion from $917 million and pretax earnings to $892 million from $772 million, mainly reflecting higher licensee sales of CDMA-based devices. The prior-year quarter included $71 million of revenue attributable to fiscal 2009, complicating comparison. QTL operating margin was 84%, versus 85%.
- QWI revenue increased to $172 million from $142 million, while pretax earnings were negligible versus $9 million, reflecting lower QIS gross margin and higher Firethorn operating losses.
- QSI reported a pretax loss of $159 million, versus $107 million. The current quarter included $64 million related to the FLO TV plan; increased FLO TV losses and interest on India spectrum-related loans also contributed.
- Net investment income rose to $219 million from $173 million, including higher realized gains and lower impairment losses on investments. Income tax expense decreased to $159 million from $211 million; the quarterly effective tax rate was 12%, versus 20%.
Outlook, management commentary and risks
- Management expected continued growth in 3G and 3G/4G multimode devices, including smartphones, tablets and lower-end 3G devices, while noting competition, pricing pressure and uneven regional economic growth. No consolidated revenue or earnings guidance is stated in the provided filing text.
- Management estimated a fiscal 2011 annual effective tax rate of approximately 14%. The quarter’s lower rate included a $32 million benefit from the retroactive extension of the federal R&D tax credit.
- Qualcomm agreed to sell substantially all of its 700 MHz spectrum for $1.9 billion, subject to regulatory approvals and other closing conditions. It expected to shut down FLO TV and its network in March 2011. Estimated restructuring and related charges were $300–$375 million, including $135–$185 million of future cash expenditures; activities were expected to be substantially complete by the end of fiscal 2012.
- Management anticipated fiscal 2011 capital expenditures more than three times fiscal 2010’s level, excluding the prior-year $1.1 billion India spectrum advance, principally due to an estimated $975 million investment in a Taiwan manufacturing facility expected to operate in fiscal 2012.
- On January 5, 2011, after the quarter-end, Qualcomm agreed to acquire Atheros Communications for $45 per share in cash, representing approximately $3.1 billion enterprise value at announcement. Closing was expected in the first half of calendar 2011, subject to approvals and other conditions.
- Material exposures include ongoing licensing and antitrust disputes, including appeals or proceedings in Korea and Japan, an Icera complaint before the European Commission, Panasonic arbitration, and possible Tessera back-damages claims. Qualcomm stated it had not accrued for the described legal matters because losses were not considered probable and any range could not be reasonably estimated. The SEC’s formal investigation remained ongoing; the company reported that its internal review found no financial-statement errors.
- Key business risks include dependence on wireless technology deployments and a limited number of significant customers/licensees, competition and selling-price pressure, reliance on third-party chip suppliers, intellectual-property and regulatory challenges, investment-market and foreign-exchange exposure, and execution risks related to restructuring and acquisitions. More than 90% of revenue was from international customers.
Most important facts for investors to verify
- Whether reported chipset shipments and licensee device sales translate into sustained QCT and QTL growth, and how product mix and pricing affect margins.
- The timing and cash impact of the $1.5 billion tax payment, the India loans and their variable interest and prepayment terms, and the concentration of cash and securities held by foreign subsidiaries.
- Regulatory completion and proceeds from the proposed $1.9 billion spectrum sale; final FLO TV closure costs versus the $300–$375 million estimate.
- Capital spending plans, including the Taiwan facility, and funding and closing terms for the proposed Atheros acquisition.
- Developments in material licensing, antitrust, patent and SEC matters, including any change in the company’s assessment of probable losses or revenue recognition.