QCOM

QUALCOMM INC. 10-Q Summary: Quarter Ended March 30, 2003

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 30, 2003 (the second quarter of fiscal 2003), and the six months ended March 30, 2003. QUALCOMM Incorporated designs, manufactures, and markets digital wireless telecommunications products and services based on CDMA technology. The company operates through four reportable segments: QUALCOMM CDMA Technologies (QCT), QUALCOMM Technology Licensing (QTL), QUALCOMM Wireless & Internet (QWI), and QUALCOMM Strategic Initiatives (QSI).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 50% year-over-year for the quarter and 53% for the six-month period. QCT revenues grew significantly due to a 90% increase in unit shipments of Mobile Station Modem (MSM) integrated circuits. QTL royalties increased due to higher phone sales by licensees.
• Asset Impairment: The company recorded a non-cash asset impairment charge of $160 million related to its Brazilian subsidiary, Vésper Holding. This charge was driven by a regulatory denial by Anatel regarding Vésper's use of spectrum for mobile services, leading management to pursue an exit strategy.
• Investment Losses: Net investment expense increased due to other-than-temporary losses on marketable securities (including a $55 million charge on Korea Telecom Freetel and a $16 million charge on a semiconductor packaging provider) and increased equity in losses from strategic investees like Inquam and VeloCom.
• Goodwill Amortization: Amortization of goodwill dropped from $64 million in the prior year quarter to $2 million in the current quarter following the adoption of FAS 142, which prohibits goodwill amortization.
• Tax Provision: The company reversed approximately $1.1 billion of its valuation allowance on U.S. deferred tax assets, recorded as a credit to stockholders' equity, as it now believes it will have sufficient taxable income to utilize these assets.

Guidance, Outlook, and Risks

• Vésper Exit Strategy: Management is pursuing an expedited exit strategy for Vésper Holding due to regulatory hurdles in Brazil. The company expects Vésper to require approximately $14 million in cash funding over the next three months and anticipates realizing cumulative translation losses upon disposition.
• Strategic Investments: The company continues to face funding requirements for strategic investments. Inquam Limited requires an estimated $150 million to $170 million in additional funding for calendar 2003 and is not expected to be cash flow positive until 2007.
• Stock Repurchase Program: The Board authorized a $1 billion stock repurchase program. During the quarter, the company repurchased 3.6 million shares for $124 million, with $876 million remaining under the authorization.
• Key Risks: Risks include the success of CDMA technology deployment, global economic weakness, currency fluctuations (particularly the Brazilian real), and the collectibility of finance receivables from wireless operators like Pegaso and Vésper.

Investor Verification Checklist

• Vésper Disposition: Verify the progress of the exit strategy for Vésper Holding and the potential for additional impairment charges or write-offs beyond the initial $160 million.
• Strategic Investment Funding: Monitor the funding status of Inquam Limited and other strategic investments to assess potential future cash outflows or equity losses.
• Regulatory Environment: Track regulatory developments in Brazil (Anatel) and other key international markets that could impact Vésper's operations or CDMA deployment.
• Customer Concentration: Review the dependency on top customers (Samsung, LG, Motorola, Kyocera), which accounted for 52% of consolidated revenues in the first six months of fiscal 2003.
• Valuation Allowance Reversal: Confirm the sustainability of the reversal of the $1.1 billion deferred tax valuation allowance and its impact on future effective tax rates.