QUALCOMM Incorporated — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended June 24, 2012; each period comprised 13 and 39 weeks, respectively. Comparisons are to periods ended June 26, 2011. Amounts are in U.S. dollars.
Business context and results
Qualcomm develops wireless integrated circuits and software, licenses its intellectual property, and operates wireless services and strategic investment businesses. QCT supplies chipsets; QTL licenses technology and collects royalties. Fiscal Q3 results reflected growth in both businesses, while chipset margins remained under pressure.
| Metric | Q3 2012 | Q3 2011 | First nine months 2012 | First nine months 2011 |
|---|---|---|---|---|
| Total revenue | $4.626B | $3.623B | $14.251B | $10.840B |
| Operating income | $1.382B | $1.113B | $4.448B | $3.789B |
| Income from continuing operations | $1.206B | $985M | $4.044B | $3.501B |
| Net income attributable to Qualcomm | $1.207B | $1.035B | $4.838B | $3.204B |
| Diluted EPS, total | $0.69 | $0.61 | $2.78 | $1.90 |
| Diluted EPS, continuing operations | $0.69 | $0.58 | $2.35 | $2.09 |
Financial position, cash flow and liquidity
- Cash and investments: Cash and cash equivalents were $3.412B; marketable securities totaled $23.135B. Combined, cash and securities were approximately $26.5B at June 24, 2012, up $5.6B from fiscal year-end. $16.9B was held by foreign subsidiaries; $15.8B was indefinitely reinvested and could incur material tax effects if repatriated.
- Cash flow, nine months: Operating cash flow was $4.589B, versus $3.080B. Capital expenditures were $1.034B, versus $400M. Investing activities used $6.875B; financing activities provided $260M. Cash and cash equivalents declined $2.050B during the period.
- Debt: Loans and debentures totaled $968M, associated with India BWA spectrum subsidiaries and denominated in Indian rupees. The $504M loans were due December 18, 2012; $464M of debentures were due June 25, 2017, but holders could demand redemption on June 25, 2013, subject to notice, so they were classified as current.
- Other obligations: Current liabilities were $5.516B and total liabilities $9.840B. A $170M current payable remained under the Broadcom settlement. Noncancelable purchase commitments were approximately $1.9B for the remainder of fiscal 2012 and $320M for fiscal 2013.
- Returns to shareholders: Dividends paid in the first nine months totaled $1.158B in cash; dividends charged to retained earnings were $1.174B. The company repurchased 8.6M shares for $471M during the period and reported about $3.5B remaining under its buyback authorization, net of an outstanding put option.
Material changes versus comparable periods
- Q3 revenue increased approximately 28%; revenue from equipment and services rose to $2.948B from $2.297B, and licensing revenue rose to $1.678B from $1.326B. Nine-month revenue increased approximately 31%.
- Q3 MSM integrated-circuit shipments rose to 141M from 120M. QCT revenue increased to $2.869B from $2.194B; QTL revenue increased to $1.593B from $1.257B.
- QCT operating margin fell to 16% from 20% in Q3 and to 20% from 24% for the first nine months. Management cited lower average selling prices, unfavorable mix and higher product-support costs; lower unit costs partly offset these pressures. Company cost of equipment and services revenue was 58% of related revenue in Q3 versus 56%, and 57% versus 52% for the nine months.
- Research and development expense increased to $974M from $757M in Q3, and to $2.801B from $2.144B for the nine months, largely reflecting product and technology investment and higher share-based compensation.
- QTL’s nine-month comparison includes $401M of revenue recorded in the prior-year period from agreements settling licensee disputes, including an arbitration with Panasonic.
- Net income from discontinued operations was $753M for the first nine months, versus a $307M loss in the prior-year period. The 2012 result included a $1.2B gain from the sale of substantially all FLO TV 700 MHz spectrum for $1.9B; Q3 discontinued operations were a $3M loss.
Outlook, commentary and risks
- Management expected continued growth in 3G and 3G/4G devices, including smartphones and data-centric products, and further 3G expansion in China, India and other emerging markets. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- Management said demand for 28-nanometer integrated circuits was expected to exceed supply, with shortages likely to continue. QCT anticipated a strong first quarter of fiscal 2013 as supply increased and new devices launched for the holiday season.
- Qualcomm planned to reorganize in Q1 fiscal 2013: Qualcomm Incorporated would retain the licensing business and most of the patent portfolio, while a new wholly owned subsidiary would operate substantially all R&D and product and services businesses.
- The company updated QMT’s plan to emphasize licensing next-generation IMOD display technology while directly commercializing selected products. QMT had $1.3B of assets; the company recorded no QMT impairment in Q3 after concluding the reporting unit and asset groups were recoverable. Firethorn goodwill impairment was $23M for the nine months.
- India BWA spectrum developments included an $81M payment to the Indian government, recorded as an operating expense, and assignment of spectrum to a subsidiary. A petition challenging shortened license and rollout periods was pending; a hearing was scheduled for August 3, 2012. The licenses carry rollout requirements and potential forfeiture risk.
- Qualcomm disclosed ongoing SEC and DOJ investigations, including an FCPA-related inquiry. The company reported identifying benefits provided to individuals associated with Chinese state-owned entities, valued at less than $250,000 excluding employment compensation, and said investigations were continuing. It could not predict the outcome.
- Other legal matters include patent and competition disputes in several jurisdictions. The company had not accrued losses for the described proceedings because it considered liabilities not probable and could not reasonably estimate a possible loss range. Other key risks include dependence on a limited number of customers and licensees, supplier capacity constraints, competition, intellectual-property challenges, currency exposure, and marketable-securities valuation risk.
- The estimated fiscal 2012 annual effective tax rate was approximately 20%; the Q3 effective rate was 24%. The federal R&D tax credit was reflected only through its December 31, 2011 expiration. Singapore tax incentives for QCT were conditional on employment and investment criteria.
Important facts for investors to verify
- Whether 28-nanometer supply improves as expected and how chipset mix, pricing and gross margins develop.
- How much of reported earnings and cash generation is attributable to the one-time FLO TV spectrum sale, and the continuing results of operations.
- Timing and funding of the $504M India BWA loan maturity, the debenture redemption provisions, and progress on spectrum rollout and the pending petition.
- Developments and potential financial or operational consequences of the SEC/DOJ investigations and pending patent, competition and other legal proceedings.
- Availability and use of foreign-held cash, including potential tax costs of repatriation, alongside planned investment, dividends and share repurchases.