QUALCOMM Incorporated — Fiscal 2014 Third-Quarter 10-Q
Reporting period: 13 weeks ended June 29, 2014. Financial statements are unaudited. Comparisons are with the quarter ended June 30, 2013 unless otherwise noted. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q3 FY2014 | Prior-year quarter |
|---|---|---|
| Total revenue | $6.806 billion | $6.243 billion |
| Operating income | $2.075 billion | $1.677 billion |
| Net income attributable to Qualcomm | $2.238 billion | $1.580 billion |
| Diluted EPS | $1.31 | $0.90 |
| Operating margin | 30.5% | 26.9% |
- Revenue increased 9%; equipment and services revenue rose 15% to $4.922 billion, while licensing revenue declined 4% to $1.884 billion.
- QCT revenue was $4.957 billion, up from $4.222 billion; QTL revenue was $1.803 billion, down from $1.867 billion. QCT shipped approximately 225 million MSM integrated circuits, up 31% year over year.
- Equipment-and-services cost was 56% of that revenue, versus 58% a year earlier. R&D spending rose to $1.429 billion; SG&A declined to $582 million.
- Investment income was $422 million, including $290 million in realized gains on marketable securities. The quarterly effective tax rate was 10%, including a $66 million tax benefit related to an IRS agreement.
- For the first nine months, revenue was $19.795 billion, up 8%; net income attributable to Qualcomm was $6.073 billion, up 13%. This period included $430 million of after-tax discontinued-operations income from the Omnitracs sale.
- Cash and cash equivalents were $7.944 billion; marketable securities totaled $24.772 billion. Cash, cash equivalents and marketable securities together were approximately $32.7 billion. Operating cash flow for the first nine months was $7.268 billion; capital expenditures were $955 million.
- Current assets were $22.408 billion and current liabilities $6.021 billion. Total liabilities were $9.568 billion. No borrowings under loans or debentures were reported in the nine-month cash-flow statement; the filing does not provide a clear standalone total for debt. Capital lease obligations had a present value of $12 million.
- During the first nine months, Qualcomm repurchased $3.354 billion of stock and paid $1.884 billion in cash dividends. It had $6.5 billion remaining under its repurchase authorization at quarter-end.
Material changes and unusual items
- QMT recorded $444 million of impairment charges in Q1 and a further $164 million in Q3; total nine-month QMT impairment charges were $607 million. Management described a shift toward licensing next-generation IMOD display technology and focusing on wearable devices.
- In Q3, the company reversed a $173 million ParkerVision damages accrual after a court overturned the infringement verdict and entered judgment for Qualcomm. ParkerVision appealed. A separate complaint alleging infringement of additional patents was also pending.
- Qualcomm completed the sale of Omnitracs’ North and Latin America operations for $788 million net of cash sold, recording a $665 million pretax gain ($430 million after tax) in discontinued operations.
- The company announced a $0.42-per-share dividend payable September 24, 2014. Management said it expected at least $1 billion of stock repurchases in Q4 and intended to return 75% of free cash flow to stockholders over the foreseeable future.
Outlook, commentary and risks
- Management expected continued 3G/4G adoption, demand for advanced and lower-tier smartphones, and opportunities from China’s LTE rollout. It provided no specific numerical revenue or earnings guidance in the supplied filing text.
- Management cited China risks: an NDRC antimonopoly investigation, alleged underreporting of licensed-device sales by some licensees, and delays by unlicensed companies in signing licenses. Qualcomm considered a loss in the NDRC matter probable, but said the possible loss range could not be reasonably estimated; no accrual was recorded.
- The SEC had issued a Wells Notice recommending consideration of an FCPA enforcement action concerning benefits to individuals associated with Chinese state-owned entities. Qualcomm disputed the allegations, submitted responses, and said the outcome of the SEC and DOJ investigations could not be predicted.
- Other material exposures included ongoing Korean and Japanese competition matters, intellectual-property disputes, possible royalty and license disputes, customer and licensee concentration, competitive pricing, reliance on third-party manufacturing suppliers, and market and investment-portfolio risks.
- About $25.5 billion of cash and marketable securities was described as indefinitely reinvested offshore and potentially subject to material tax effects if repatriated. Management expected existing liquidity and operating cash flow to cover capital needs for at least 12 months, while anticipating possible additional borrowing within two years to support capital returns.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether the NDRC investigation results in penalties or required changes to Qualcomm’s licensing and chipset practices.
- Progress and outcome of the SEC and DOJ FCPA investigations, and the ParkerVision appeal and additional lawsuit.
- Whether China licensee reporting and licensing disputes affect QTL royalties and collections.
- How QCT shipment growth, pricing and product mix affect margins, and whether announced repurchases and dividends remain consistent with the stated capital-return plan.