Business Context and Reporting Period
Company: QUALCOMM Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended July 1, 2001 (Fiscal 2001)
Business Overview: QUALCOMM designs, develops, and markets digital wireless communications products and services based on CDMA technology. The company operates through three primary segments: QUALCOMM CDMA Technologies (QCT), QUALCOMM Technology Licensing (QTL), and QUALCOMM Wireless Systems (QWS). In July 2001, the company announced it would no longer spin off its integrated circuits and system software business and reorganized its corporate structure.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended July 1, 2001 |
9 Months Ended July 1, 2001 |
9 Months Ended June 25, 2000 |
|---|---|---|---|
| Revenues | $640,027 | $2,037,303 | $2,561,335 |
| Operating Income (Loss) | $105,219 | $(74,775) | $549,146 |
| Net (Loss) Income | $(274,736) | $(354,407) | $531,536 |
| Diluted EPS (Loss) | $(0.36) | $(0.47) | $0.67 |
| Cash and Cash Equivalents | $965,417 | $965,417 | $712,709 |
| Total Assets | $5,757,083 | $5,757,083 | $6,062,982 |
| Total Liabilities | $555,023 | $555,023 | $500,011 |
| Net Cash Provided by Operating Activities | N/A | $378,904 | $549,129 |
Note: The nine-month net loss includes a $129 million gain (net of tax) from a change in accounting principle (FAS 133) recorded at the beginning of fiscal 2001. Excluding this gain, the loss would be significantly higher.
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 10% year-over-year for the quarter and 20% for the nine-month period. This was driven by lower revenues from the Globalstar business, lower license fees, and reduced unit shipments of certain integrated circuits and OmniTRACS units.
- Significant Impairment Charges: The company recorded $504 million in asset impairment and related charges for the nine months ended July 1, 2001, compared to $46 million in the prior year. This includes $475 million related to the Globalstar business and $32 million related to Vesper Companies.
- Investment Losses: Net investment income turned into a $208 million expense for the nine-month period, compared to $434 million income in the prior year. This was due to $181 million in unrealized losses on derivative instruments (FAS 133 adoption) and $147 million in other-than-temporary losses on marketable securities.
- Segment Performance:
- QCT: Revenues flat ($333M vs $338M); Earnings before tax (EBT) declined to $71M from $110M due to higher R&D and SG&A.
- QTL: Revenues declined slightly ($170M vs $174M); EBT declined to $143M from $152M.
- QWS: Revenues dropped significantly ($105M vs $167M) due to Globalstar restructuring and lower OmniTRACS demand; EBT fell to $30M from $65M.
Guidance, Outlook, and Risks
- Strategic Shifts: The company abandoned plans to spin off its integrated circuits business. It also announced a new corporate structure with two business groups: Wireless & Internet and CDMA Technologies.
- Globalstar Restructuring: Globalstar suspended debt payments indefinitely. QUALCOMM has recorded significant charges and expects negligible revenue from Globalstar for the remainder of fiscal 2001. Remaining net assets related to Globalstar are approximately $53 million.
- Vesper Companies: Significant uncertainty remains regarding the recoverability of assets related to Vesper Companies and VeloCom. The company recorded $241 million in charges (impairment, investment expense, and non-operating charges) in the third quarter alone. Remaining net assets are approximately $120 million.
- Accounting Changes: Adoption of FAS 133 (Derivatives) caused significant volatility in earnings due to fair value adjustments on warrants (specifically Leap Wireless). Adoption of FAS 142 (Goodwill) is planned for fiscal 2003, which will cease goodwill amortization but require impairment testing.
- Liquidity: The company holds $2.33 billion in cash and marketable securities. It anticipates these funds will cover working capital and investment needs, though it may raise additional funds if necessary.
- Legal Proceedings: Several lawsuits are pending, including patent infringement claims (GTE Wireless, Zoltar) and employment-related class actions (Schwartz, Durante, Hanig). Management believes claims are without merit but acknowledges potential material adverse effects if outcomes are unfavorable.
Key Facts for Investor Verification
- Asset Impairment Magnitude: Verify the specific valuation methodologies used for the $475 million Globalstar impairment and the $241 million Vesper/VeloCom charges to assess the permanence of these losses.
- Derivative Instrument Volatility: Monitor the fair value of the Leap Wireless warrant and other derivatives, as FAS 133 adoption causes earnings to fluctuate with stock market volatility.
- Globalstar Debt Recovery: Track the progress of Globalstar's debt restructuring efforts to determine if any of the remaining $53 million in net assets can be recovered.
- Revenue Mix Shift: Confirm the sustainability of the shift toward higher-margin royalty and licensing revenue (QTL) versus lower-margin hardware sales (QCT/QWS) as the company exits the consumer phone business.
- Effective Tax Rate: Note the projected negative 3% effective tax rate for fiscal 2001, driven by foreign taxes and valuation allowances on deferred tax assets due to projected losses.