QUALCOMM Incorporated — Q3 Fiscal 2010 Form 10-Q
Reporting period: Unaudited quarter and nine months ended June 27, 2010 (13 and 39 weeks, respectively), compared with periods ended June 28, 2009. Balance-sheet comparisons are to September 27, 2009. Amounts are in U.S. dollars.
Business context and results
QUALCOMM develops wireless chipsets and software, licenses intellectual property and operates wireless services and strategic investments. Its principal reporting segments are QCT (chipsets), QTL (licensing), QWI (wireless and internet businesses) and QSI (strategic initiatives, including FLO TV). In Q3, it shipped approximately 103 million MSM integrated circuits, up 10% year over year; reported licensed-device sales were approximately $25.2 billion, up approximately 19%.
Key financial metrics
| Metric | Q3 FY2010 | Q3 FY2009 | Nine months FY2010 | Nine months FY2009 |
|---|---|---|---|---|
| Revenue | $2.706 billion | $2.753 billion | $8.039 billion | $7.726 billion |
| Operating income | $792 million | $894 million | $2.447 billion | $1.630 billion |
| Net income | $767 million | $737 million | $2.382 billion | $790 million |
| Diluted EPS | $0.47 | $0.44 | $1.43 | $0.47 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $2.983 billion | $5.851 billion |
Q3 revenue declined about 2%, while net income rose about 4%. Nine-month revenue grew about 4%; net income increased substantially, reflecting in part the prior-year $748 million Broadcom litigation charge and improved investment results. Nine-month investment income was $541 million versus a $296 million loss in the prior-year period, including higher realized gains and lower impairment losses. Q3 net investment income was $179 million versus $90 million.
Equipment and services revenue was $1.772 billion in Q3, down from $1.862 billion; licensing and royalty revenue was $934 million, up from $891 million. Equipment and services cost was 51% of related revenue in Q3 versus 46% a year earlier (approximately 49% versus 54% gross margin). QCT’s Q3 operating margin was 24% versus 31%; QTL’s was 80% versus 83%. The filing reports a 20% estimated full-year FY2010 effective tax rate; Q3 effective tax rate was 21% versus 25%.
Cash, liquidity and capital allocation
At June 27, 2010, cash and cash equivalents were $2.541 billion and marketable securities totaled $15.045 billion, or approximately $17.6 billion combined. Current assets were $11.614 billion and current liabilities $5.190 billion, giving working capital of approximately $6.424 billion. Cash and marketable securities were down approximately $156 million from September 2009. The company reported $5.9 billion held domestically and $11.7 billion at foreign subsidiaries.
Nine-month operating cash flow fell to $2.983 billion from $5.851 billion. Management attributed the decline primarily to the prior-year collection of a $2.5 billion Nokia-related receivable. Investing cash outflow was $996 million, including a $1.064 billion advance for India spectrum; financing cash outflow was $2.150 billion, principally reflecting $2.893 billion of share repurchases and $872 million of dividends.
A $1.061 billion Indian-rupee bank loan, bearing fixed interest at 6.75%, is due in December 2010. The company said it must also pay $1.4 billion to U.S. tax authorities in the first quarter of FY2011, funded from domestic cash. The balance sheet included a $495 million carrying value for the Broadcom settlement liability; management separately disclosed $518 million remaining to be paid, including interest, ratably through April 2013.
During the first nine months, QUALCOMM repurchased 76.3 million shares for $2.9 billion. At quarter-end, $1.8 billion remained under its $3.0 billion authorization. The quarterly dividend rose from $0.17 to $0.19 per share; a further $0.19 dividend was declared for payment in September 2010.
Changes, outlook and management commentary
- Q3 QCT revenue fell $99 million year over year despite higher chip shipments; management cited product mix and average selling-price effects. QCT earnings before taxes declined to $404 million from $548 million.
- Nine-month QCT revenue increased to $4.835 billion from $4.436 billion, supported by higher shipments; MSM shipments were approximately 288 million versus 226 million. QTL revenue was broadly flat at $2.738 billion versus $2.769 billion, with lower royalties per unit partly offset by device volumes and a $71 million prior-year revenue recognition.
- Management expects continued growth in 3G devices and services, strong demand for advanced and lower-cost devices, and ongoing investment in CDMA, LTE, chipsets, software and services. It expects competition and pricing pressure, particularly in lower-end devices, to continue. No specific revenue or earnings forecast is stated in the supplied filing text.
- QUALCOMM won a 20 MHz BWA spectrum slot in four Indian telecom circles for approximately $1.1 billion. It expects licenses by December 2010 and intends to seek operator partners to build an LTE network, subject to rollout requirements and market and regulatory conditions.
- FLO TV remained a significant investment: QSI recorded a $41 million Q3 pretax loss and a $283 million nine-month pretax loss. Management is evaluating a sale, joint venture or alternative use of its assets if consumer adoption is inadequate. FLO TV assets totaled $1.3 billion; impairment is a stated risk.
Risks, contingencies and unusual items
- Legal and regulatory matters include the Tessera patent case and ITC orders (patents scheduled to expire September 2010); appeals of the Korean Fair Trade Commission decision and fine, already paid; a stayed Japanese Fair Trade Commission order; an EU Commission review following an Icera complaint; and Panasonic royalty arbitration. QUALCOMM deferred recognition of Panasonic-related royalties. It said it had not accrued for the other described proceedings because losses were not considered probable and could not be reasonably estimated.
- Customer and geographic concentration remains significant: four customers represented 43% of nine-month revenue, and 67% of revenue came from customers and licensees based in South Korea, China and Taiwan. More than 90% of revenue was from international customers.
- Other material risks include intellectual-property and licensing challenges, technology adoption and pricing pressure, dependence on third-party chip manufacturing and testing, marketable-security impairment, foreign-exchange exposure and the execution and return prospects of spectrum, FLO TV and other strategic investments.
- Marketable securities included $171 million of auction-rate securities valued using significant unobservable inputs. The filing also reported temporary unrealized losses and warned that further impairment or realized losses could occur.
- The company adopted amended revenue-recognition guidance early in FY2010; it said adoption did not materially affect revenue timing or pattern. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether the $1.4 billion FY2011 tax payment and $1.061 billion loan repayment were completed as planned, and their effect on domestic liquidity.
- Developments and potential financial exposure in the Panasonic arbitration, competition investigations and patent litigation.
- QCT pricing, product mix and margin trends, alongside shipment growth; and QTL royalty-per-device trends, licensee reporting and deferred Panasonic revenue.
- India spectrum license assignment, operator-partner arrangements, rollout obligations and the intended exit from any LTE venture.
- FLO TV’s adoption, operating losses and recoverability of its $1.3 billion asset base, as well as marketable-security valuation and impairment exposure.