What drove QUALCOMM's earnings growth in fiscal 2003?

Most of the growth came from the QCT chipset business, where revenue rose 52% on higher MSM shipments and a richer 1X product mix, along with QTL royalty growth of about 18% from higher licensee phone sales. Research and development grew more slowly than revenue, which lifted operating margins. Lower goodwill amortization, which fell to $9 million from $259 million after SFAS 142 was adopted, also helped reported results.

How much of the company's future depends on a few customers and one country?

Significantly. Samsung, LG Electronics, Motorola and Kyocera accounted for roughly 52% of revenue in aggregate, and South Korea alone generated 43% of revenue. The 10-K states that losing any one major customer could reduce revenue and harm operating results. Continued 3G adoption in Korea, Japan and China, along with the timing of CDMA2000 1X and 1xEV-DO deployments, is therefore central to the outlook.

What is the risk from the Vésper and other strategic investments?

Vésper, the Brazilian operator, is being sold to Embratel for nominal consideration, subject to regulatory approval. QUALCOMM expects a $35 to $45 million loss on closing, requires $40 to $45 million in funding through closing, and may take further losses if the sale does not close. Other exposures include an $81 million KTF impairment, Inquam investments with substantial ongoing cash needs, and the remaining Pegaso and Ericsson-related financing commitments. Management says most strategic investments are illiquid and carry a high degree of risk.

Are there any material legal or accounting items investors should note?

The Zoltar patent suit is set for trial in February 2004, and a breach-of-contract dispute with Texas Instruments began in 2003. Several former-employee suits and wireless handset health-related class actions are also pending. No litigation accrual has been recorded, and management believes the claims lack merit. On the accounting side, the company reversed about $1.1 billion of its valuation allowance on U.S. deferred tax assets, credited to equity rather than to earnings, and may face a future stock option expensing requirement that could reduce net income by about $260 million a year.

QCOM 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed November 5, 2003. Cited figures are marked; the original filing is the authoritative source.

QUALCOMM's fiscal 2003 10-K (fiscal year ended September 28, 2003, presented as September 30) shows a company at a strong inflection point.

Revenue rose 31% to $3.97 billion^a from $3.04 billion, operating income more than doubled to $1.31 billion from $673 million, and net income reached $827 million, or $1.01 diluted EPS, versus $360 million ($0.44) a year earlier. The growth was driven mainly by QCT, the chipset business, whose revenue climbed 52% to $2.42 billion on higher MSM chip shipments (about 99 million units versus 65 million), and by QTL royalty revenue, which rose to $838 million from $725 million. Cash, cash equivalents and marketable securities reached $5.4 billion, and the company initiated its first quarterly dividend ($0.05, raised to $0.07 in July 2003) and a $1 billion, two-year buyback authorization.

The main investor considerations are concentration and strategic exposure. Four customers accounted for 51%^b of consolidated revenue, South Korea alone for 43%, and Samsung, LG, Motorola and Kyocera are major accounts. Management notes that a significant share of 3G growth depends on CDMA2000 1X and 1xEV-DO deployments, while WCDMA and GSM competition is intensifying.

The QSI segment remains a drag: it posted a $448 million^c pre-tax loss, driven by Vésper, the Brazilian carrier that is being sold to Embratel for nominal consideration and carries a $160 million impairment plus an expected $35 to $45 million loss on disposal, and by investment write-downs including KTF and Inquam. Finance receivables from Pegaso were largely repaid during the year, reducing that credit exposure.

Litigation is ongoing, including the Zoltar patent case with trial set for February 2004 and a dispute with Texas Instruments. The effective tax rate was about 36%, and the valuation allowance reversal of roughly $1.1 billion^d was credited to equity rather than to earnings.

02—Key points

Key Highlights

Revenue grew 31% to $3.97 billion; operating income rose 95% to $1.31 billion, and net income more than doubled to $827 million ($1.01 diluted EPS).
QCT (chip) segment revenue rose 52% to $2.42 billion, with operating margin improving to 33% from 28% on strong MSM unit shipments of about 99 million.
QTL (licensing) revenue increased 18% to $1.00 billion, with royalty revenue from licensees reaching $838 million, supported by higher CDMA phone sales.
Cash and marketable securities totaled $5.4 billion, up $2.2 billion, supported by $1.8 billion of operating cash flow and $663 million collected from Pegaso finance receivables.
Capital return began: the first dividend of $0.05 per share was paid in fiscal 2003 and raised to $0.07, and a $1 billion, two-year buyback was authorized, with $158 million used in the year.
Concentration risk is high: four customers represent 51% of revenue, South Korea accounts for 43%, and international customers make up 78% of total revenue.
QSI segment posted a $448 million pre-tax loss, including a $160 million Vésper impairment, a $34 million Australian spectrum impairment, and investment write-downs, with the Vésper exit still subject to regulatory approval.

03—Questions

Frequently Asked Questions

What drove QUALCOMM's earnings growth in fiscal 2003?
Most of the growth came from the QCT chipset business, where revenue rose 52% on higher MSM shipments and a richer 1X product mix, along with QTL royalty growth of about 18% from higher licensee phone sales. Research and development grew more slowly than revenue, which lifted operating margins. Lower goodwill amortization, which fell to $9 million from $259 million after SFAS 142 was adopted, also helped reported results.
How much of the company's future depends on a few customers and one country?
Significantly. Samsung, LG Electronics, Motorola and Kyocera accounted for roughly 52% of revenue in aggregate, and South Korea alone generated 43% of revenue. The 10-K states that losing any one major customer could reduce revenue and harm operating results. Continued 3G adoption in Korea, Japan and China, along with the timing of CDMA2000 1X and 1xEV-DO deployments, is therefore central to the outlook.
What is the risk from the Vésper and other strategic investments?
Vésper, the Brazilian operator, is being sold to Embratel for nominal consideration, subject to regulatory approval. QUALCOMM expects a $35 to $45 million loss on closing, requires $40 to $45 million in funding through closing, and may take further losses if the sale does not close. Other exposures include an $81 million KTF impairment, Inquam investments with substantial ongoing cash needs, and the remaining Pegaso and Ericsson-related financing commitments. Management says most strategic investments are illiquid and carry a high degree of risk.
Are there any material legal or accounting items investors should note?
The Zoltar patent suit is set for trial in February 2004, and a breach-of-contract dispute with Texas Instruments began in 2003. Several former-employee suits and wireless handset health-related class actions are also pending. No litigation accrual has been recorded, and management believes the claims lack merit. On the accounting side, the company reversed about $1.1 billion of its valuation allowance on U.S. deferred tax assets, credited to equity rather than to earnings, and may face a future stock option expensing requirement that could reduce net income by about $260 million a year.

04—Continue

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