QUALCOMM Incorporated — Form 10-Q Summary
Business context and period. Fiscal first quarter ended December 30, 2012 (13 weeks), compared with the 13 weeks ended December 25, 2011. Qualcomm’s principal businesses are QCT chipsets and related software, and QTL patent licensing and royalties. The statements are unaudited.
Key financial results
| Metric | Q1 FY2013 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $6.018 billion | $4.681 billion | +29% |
| Operating income | $2.088 billion | $1.551 billion | +35% |
| Net income attributable to Qualcomm | $1.906 billion | $1.401 billion | +36% |
| Diluted EPS | $1.09 | $0.81 | +35% |
| Operating cash flow | $1.975 billion | $1.779 billion | +11% |
- Equipment and services revenue was $4.199 billion, up 33%; licensing revenue was $1.819 billion, up 20%.
- Operating margin was approximately 34.7%, versus 33.1%. Equipment and services cost was 53% of related revenue, compared with 55%.
- QCT revenue was $4.120 billion, up 34%, with segment earnings before tax (EBT) of $1.068 billion. QTL revenue was $1.757 billion, up 22%, and EBT was $1.532 billion. QWI revenue was $146 million; QSI reported a $17 million EBT loss.
- Qualcomm shipped approximately 182 million MSM integrated circuits, up 17%. Licensees’ reported device sales were approximately $53.3 billion, up 29%.
- Cash and cash equivalents were $4.293 billion. Marketable securities totaled $24.078 billion; combined cash, cash equivalents and marketable securities were $28.4 billion, up approximately $1.5 billion from September 30, 2012. About $18.3 billion was held by foreign subsidiaries, including $17.8 billion in jurisdictions where earnings were indefinitely reinvested.
- Operating cash flow was $1.975 billion; investing activities used $1.227 billion and financing activities used $275 million. Capital expenditures were $205 million. The quarter included $428 million of dividends paid and $250 million of share repurchases.
- Total assets were $44.841 billion and total liabilities were $9.487 billion. No general corporate borrowing balance is identified in the supplied filing text; separately, $1.039 billion of India BWA subsidiary loans and debentures was classified as held for sale.
Changes and notable items
- Revenue growth reflected increased QCT shipments and product mix, as well as increased QTL licensing revenue, primarily from higher sales of CDMA-based devices by licensees.
- R&D expense rose to $1.106 billion from $873 million, largely reflecting investment in 3G, 4G LTE and related technologies. SG&A rose to $587 million from $503 million, including higher employee-related and legal costs.
- Net investment income increased to $239 million from $170 million, including higher realized gains on marketable securities and lower interest expense. The comparison quarter included derivative gains associated primarily with put options that expired in fiscal 2012.
- Inventory increased to $1.277 billion from $1.030 billion, driven by work-in-process and finished goods; management cited the timing of inventory receipts and builds and easing 28-nanometer supply constraints.
Outlook, risks and contingencies
- Management expected continued growth in 3G and 3G/4G devices, smartphones and data-centric devices, and continued deployment of LTE. It reported strong industry demand for 28-nanometer integrated circuits and did not anticipate significant supply shortages relative to expected customer demand. The filing provides no specific revenue or EPS guidance in the supplied text.
- Management estimated a fiscal 2013 annual effective tax rate of approximately 16%, reflecting reinstatement of the federal R&D tax credit; the quarter’s effective rate was 18%. The expected fiscal-year estimate and a discrete benefit for fiscal 2012 were to be reflected in the second quarter.
- India BWA obligations were approximately $1.039 billion, denominated in Indian rupees, with stated rates around 10.0%–10.25%. Bharti Airtel’s ownership of the BWA subsidiaries is expected to increase to 100% over time if conditions are met. Debenture holders may demand redemption on June 25, 2013, subject to required notice.
- Noncancelable purchase obligations were approximately $3.7 billion for the remainder of fiscal 2013, including $3.3 billion for integrated circuit inventories. Management said existing liquidity and expected operating cash flow should meet working and other capital requirements over the next fiscal year and beyond.
- Material uncertainties include patent and competition-related disputes and investigations. The SEC and DOJ were investigating FCPA compliance; Qualcomm disclosed benefits provided to individuals associated with Chinese state-owned entities or agencies, with an estimated aggregate value below $250,000 excluding employment compensation. The company could not predict outcomes, recorded no accrual for these matters, and said potential losses could not be reasonably estimated.
- Other identified proceedings include patent litigation with Tessera, MicroUnity, MOSAID and ParkerVision, and inquiries or proceedings involving competition authorities in Europe, Korea and Japan. The filing states that unfavorable outcomes could materially affect results, financial condition or cash flows.
- Principal business risks include customer and licensee concentration, intense competition and pricing pressure, dependence on third-party chip manufacturing capacity, challenges to Qualcomm’s licensing model and intellectual property, technology and product execution, currency exposure, regulatory changes and possible impairment of QMT assets.
Important facts for investors to verify
- Whether strong QCT shipment growth and higher QTL royalties are sustainable, and how product mix, pricing and customer concentration affect margins.
- Whether inventory levels and supplier capacity, especially for advanced process technologies, remain aligned with demand.
- The location and tax implications of offshore liquidity, including the company’s indefinitely reinvested foreign earnings.
- Developments in the FCPA investigations, patent cases and competition proceedings, and any resulting financial or business impact.
- Progress toward the planned transfer of the India BWA subsidiaries and the associated debt obligations and redemption terms.