Business Context and Reporting Period
Company: QUALCOMM Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 30, 2008 (Second Quarter of Fiscal 2008)
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, except per share) | Three Months Ended Mar 30, 2008 |
Three Months Ended Apr 1, 2007 |
Six Months Ended Mar 30, 2008 |
Six Months Ended Apr 1, 2007 |
|---|---|---|---|---|
| Total Revenues | $2,606 | $2,221 | $5,047 | $4,240 |
| Net Income | $766 | $726 | $1,533 | $1,373 |
| Diluted EPS | $0.47 | $0.43 | $0.93 | $0.81 |
| Operating Cash Flow (6mo) | $1,827 (2008) vs $1,780 (2007) | |||
| Cash & Marketable Securities | $10.6 billion (as of Mar 30, 2008) | |||
| Total Debt | No long-term debt reported; minimal interest expense. |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 17% year-over-year for the quarter ($2.61B vs $2.22B) and 19% for the six-month period ($5.05B vs $4.24B).
- QCT (Equipment): Revenues rose due to a 39% increase in Mobile Station Modem (MSM) integrated circuit shipments (85M units vs 61M units).
- QTL (Licensing): Royalty revenues increased driven by higher sales of CDMA-based products and the settlement of a dispute with Sony Ericsson, partially offset by the ongoing dispute with Nokia.
- Profitability: Net income increased 6% for the quarter and 12% for the six-month period. Operating margins for QCT decreased slightly due to product support costs, while QTL margins improved to 86%.
- Investment Income: Net investment income declined significantly ($93M vs $180M for the quarter) due to lower interest rates, reduced realized gains, and $62M in other-than-temporary losses on marketable securities related to credit market disruptions.
- Stock Repurchases: The company repurchased 42.6 million shares for $1.7 billion during the six months ended March 30, 2008, under a program that was replaced by a new $2.0 billion authorization in March 2008.
Guidance, Outlook, and Risks
- Outlook: Management expects continued growth in 3G (CDMA2000 and WCDMA) deployment. They anticipate high legal activity through 2009 regarding disputes with Nokia and Broadcom. The company plans to continue heavy investment in R&D for next-generation technologies (OFDMA, LTE, UMB) and low-cost devices.
- Legal Contingencies:
- Broadcom: A permanent injunction was issued against certain WCDMA products, though a limited license applies through January 2009. QUALCOMM is appealing.
- Nokia: Ongoing litigation regarding royalty obligations. QUALCOMM is not recording royalty revenue from Nokia sales after April 9, 2007, until resolved.
- Regulatory: Investigations by the European Commission, Korea Fair Trade Commission, and Japan Fair Trade Commission regarding licensing practices continue.
- Liquidity Risks: $196 million in auction rate securities are classified as noncurrent due to market illiquidity, though they are rated AAA and collateralized by U.S. government student loans. The company does not anticipate this affecting operating plans.
- Dividends: Quarterly dividend increased to $0.16 per share, payable June 27, 2008.
Investor Verification Checklist
- Nokia Dispute Impact: Verify the status of the Nokia litigation and the potential magnitude of unrecorded royalty revenue.
- Broadcom Injunction: Monitor the appeal process and the commercial impact of the injunction on WCDMA product sales.
- Investment Portfolio: Assess the risk of further "other-than-temporary" impairment charges on the $10.6 billion investment portfolio given credit market volatility.
- Customer Concentration: Note that two customers accounted for 30% of consolidated revenues in the first six months of fiscal 2008.
- MediaFLO Viability: Evaluate the progress of the MediaFLO USA subsidiary, which continues to incur losses ($63M loss in Q2) as it builds its network and subscriber base.