01—Abstract
Summary
Summary of the 10-K filed November 23, 1998. Cited figures are marked; the original filing is the authoritative source.
QUALCOMM's fiscal 1998 10-K (year ended September 27/30, 1998) shows a company in rapid expansion: total revenues rose 60% to $3.35 billiona from $2.10 billion, driven mainly by a 65% jump in communications systems revenue (CDMA handsets, infrastructure, ASICs and OmniTRACS).
Net income grew 18% to $108.5 millionb, and diluted EPS was $1.47 versus $1.28. However, profitability is thin, with a net margin of about 3%, and operating income of $243 million was only 7% of revenue. Operating cash flow was negative ($25 million) because of heavy working-capital needs from receivables, finance receivables and inventory.
Capital spending was $322 million, and cash and investments fell to $303 millionc from $809 million. The filing also reveals meaningful balance-sheet and risk exposure. QUALCOMM has $499 million in unfunded vendor-financing commitments, $289 million of finance receivables, a $265 million secured credit facility to Leap Wireless following the September 1998 spin-off, and a $660 million convertible trust preferred issue.
Revenue concentration is high, with Globalstar accounting for 11% of revenue and one Korean customer for 11%. Asian and emerging-market exposure is significant, with 34% of revenue from international customers and $697 milliond from Asia. Ongoing litigation with Ericsson and Motorola, and the ETRI arbitration, add uncertainty.
For investors, the story is a strong CDMA royalty and product franchise, with growth and a 2,800-engineer R&D base, offset by working-capital intensity, vendor-financing risk, and dependence on the pace of CDMA adoption against GSM. Management guided to higher R&D spending and a WirelessKnowledge joint venture with Microsoft that is slated for commercial availability in the first half of 1999.
02—Key points
Key Highlights
- Total revenues up 60% to $3.35B (FY1997: $2.10B); communications systems revenue up 65% to $2.86B
- Net income of $108.5M, up 18%; diluted EPS $1.47 vs. $1.28, with net margin around 3%
- Operating cash flow was negative ($24.7M) as receivables, finance receivables and inventory absorbed $394M of working capital
- Capital expenditures of $322M and total investments of $442M, with cash and investments down to $303M from $809M
- Vendor financing exposure: $499M unfunded commitments (plus $489M for non-Globalstar sales) and $289M noncurrent finance receivables
- Leap Wireless spin-off completed September 23, 1998, with a $265M secured credit facility and a warrant for ~18% of Leap's fully diluted equity
- Concentration risk: Globalstar 11% of revenue, one Korean customer 11%; 34% of revenue international, with $697M from Asia
03—Questions
Frequently Asked Questions
How strong is QUALCOMM's growth and profitability?
Revenue grew 60% to $3.35 billion, but net income grew only 18% to $108.5 million, a net margin near 3%. Operating margin was about 7%, so most of the revenue growth came from lower-margin product sales, primarily CDMA handsets and infrastructure, rather than high-margin licensing.
Why was operating cash flow negative despite positive net income?
Growth consumed working capital. Accounts receivable, finance receivables and inventories rose by a combined $394 million, and capital spending of $322 million was also funded internally. Cash and investments fell to $303 million from $809 million.
What financial risks do vendor financing and the Leap Wireless spin-off create?
QUALCOMM has $499 million in unfunded long-term financing commitments and a $265 million credit line to Leap Wireless, which it must fund and may not recover if carriers in emerging markets fail. It also retains exposure to Russia, Ukraine, Mexico, Brazil, Chile and Korea, which have seen currency and political volatility, and it may have to transfer its Ukraine interest to Leap within 18 months.
How concentrated is QUALCOMM's customer and revenue base?
Concentration is high. Globalstar represented 11% of fiscal 1998 revenue, one Korean customer 11%, and trucking-industry customers 8% of trade receivables. Management acknowledges that sales depend on relatively large orders from a limited number of customers.
What are the key legal and competitive uncertainties?
The Ericsson patent case is set for trial on April 6, 1999, and the Motorola litigation has a pretrial conference on March 1, 1999. An ICC arbitration with Korea's ETRI is also pending. Management believes none will be materially adverse, but outcomes are uncertain. Competitively, GSM has wider adoption than CDMA, and licensees such as Nokia, Motorola and Lucent are also rivals.
04—Continue