What drove the swing from a net loss in fiscal 2001 to a profit in fiscal 2002?

Fiscal 2001 included a $518 million asset impairment charge, mostly for Globalstar assets, plus large investment losses and derivative losses. In fiscal 2002 those charges largely disappeared (impairments were under $1 million), while QCT and QTL grew. Gross margin on equipment and services also improved, to about 32% excluding Vésper and Globalstar from 35% in 2001.

How concentrated is QUALCOMM's revenue, and what is the risk?

Revenue is concentrated. Samsung, Kyocera and LG together made up 41% of fiscal 2002 revenue, and South Korea (37%) and Japan (18%) together accounted for 55%. The loss or slowdown of any major customer or licensee could materially reduce revenue, and the company has no long-term supply commitments from its foundry partners.

What are the main risks in the strategic investment portfolio?

The QSI segment consolidates Vésper Holding (Brazil), which the company expects to lose money through 2003, and it needs roughly $60-70 million in the first half of fiscal 2003. Inquam needs an estimated $175-195 million in 2003 with no committed outside funding. The company holds Leap Wireless bonds and stock on which it has taken large write-downs, and it has $125 million in commitments to Leap. Management says that if CDMA carriers fail, it may have to write down financing receivables, and some carriers have already defaulted.

How much does QUALCOMM depend on royalties versus product sales going forward?

Royalty revenue from QTL is the most profitable part of the business, at an operating margin of about 89%. QTL revenue was $847 million, or 28% of the total. Royalties depend on licensees' CDMA product volumes and their pricing, and falling handset prices could reduce royalty income. Product sales (QCT) are lower margin but have grown with the shift to 3G chips.

QCOM 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed November 26, 2002. Cited figures are marked; the original filing is the authoritative source.

QUALCOMM's fiscal 2002 10-K (fiscal year ended September 30, 2002) shows a strong operating recovery from fiscal 2001, which included a $518 million^a asset impairment tied to Globalstar.

Revenue rose 13% to $3.04 billion^b from $2.68 billion, operating income rose to $673 million from $39 million, and net income swung to $360 million ($0.44 diluted EPS) from a $578 million loss. Growth was driven by the QCT chipset business (MSM shipments of about 65 million, with a richer mix toward CDMA2000 1X devices) and by royalty revenue at QTL, which carries an operating margin of roughly 89%. QTL revenue of $847 million at that margin is the highest-quality earnings stream in the company.

The balance sheet is strong, with $3.18 billion^c in cash and marketable securities and stockholders' equity of $5.39 billion. The main investor concern is the Qualcomm Strategic Initiatives (QSI) segment, which posted a pre-tax loss of $507 million. That loss reflects consolidation of the Brazilian carrier Vésper Holding, equity losses in Inquam, and $180 million of other-than-temporary losses on Leap Wireless securities.

Management flags continuing funding needs for Vésper and Inquam, substantial financing exposure to CDMA carriers (including a Pegaso bridge loan that was repaid in November 2002 after a Telefónica acquisition), and a $125 million^d Leap Wireless credit commitment that appears unlikely to be drawn. Concentration risk is significant.

Three customers (Samsung, Kyocera and LG) accounted for 41% of fiscal 2002 revenue, and South Korea and Japan together accounted for 55%. The company also faces ongoing litigation, though none of the cases has an accrual recorded.

02—Key points

Key Highlights

Revenue grew 13% to $3.04 billion, and operating income rose to $673 million from $39 million in fiscal 2001, which was depressed by $518 million in asset impairments.
Net income was $360 million ($0.44 diluted EPS), compared with a net loss of $578 million in fiscal 2001.
QTL (licensing) generated $847 million in revenue at an approximately 89% operating margin, and royalty revenue from third-party licensees rose to $725 million.
QCT (chips) revenue reached $1.59 billion with a 28% operating margin, helped by about 65 million MSM shipments and the shift to higher-end CDMA2000 1X devices.
QSI (strategic investments) posted a $507 million pre-tax loss, driven by Vésper Holding consolidation, Leap Wireless impairments and equity losses. This segment is the main earnings risk.
The company held $3.18 billion in cash and marketable securities and $5.39 billion in stockholders' equity at September 30, 2002.
Customer concentration is high: three customers (Samsung, Kyocera, LG) made up 41% of revenue, and South Korea and Japan made up 55%.

03—Questions

Frequently Asked Questions

What drove the swing from a net loss in fiscal 2001 to a profit in fiscal 2002?
Fiscal 2001 included a $518 million asset impairment charge, mostly for Globalstar assets, plus large investment losses and derivative losses. In fiscal 2002 those charges largely disappeared (impairments were under $1 million), while QCT and QTL grew. Gross margin on equipment and services also improved, to about 32% excluding Vésper and Globalstar from 35% in 2001.
How concentrated is QUALCOMM's revenue, and what is the risk?
Revenue is concentrated. Samsung, Kyocera and LG together made up 41% of fiscal 2002 revenue, and South Korea (37%) and Japan (18%) together accounted for 55%. The loss or slowdown of any major customer or licensee could materially reduce revenue, and the company has no long-term supply commitments from its foundry partners.
What are the main risks in the strategic investment portfolio?
The QSI segment consolidates Vésper Holding (Brazil), which the company expects to lose money through 2003, and it needs roughly $60-70 million in the first half of fiscal 2003. Inquam needs an estimated $175-195 million in 2003 with no committed outside funding. The company holds Leap Wireless bonds and stock on which it has taken large write-downs, and it has $125 million in commitments to Leap. Management says that if CDMA carriers fail, it may have to write down financing receivables, and some carriers have already defaulted.
How much does QUALCOMM depend on royalties versus product sales going forward?
Royalty revenue from QTL is the most profitable part of the business, at an operating margin of about 89%. QTL revenue was $847 million, or 28% of the total. Royalties depend on licensees' CDMA product volumes and their pricing, and falling handset prices could reduce royalty income. Product sales (QCT) are lower margin but have grown with the shift to 3G chips.

04—Continue

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