Why did QUALCOMM change how it recognizes royalty revenue, and how does it affect comparability?

Starting in Q4 fiscal 2004, QUALCOMM stopped estimating royalties for certain licensees and recognizes them only when licensees report them. Because no Q4 estimate was booked, reported royalty revenue was reduced once, by about $151 million. Royalties reported by licensees in fiscal 2004 were $1.29 billion, versus $1.14 billion recognized as revenue, so reported growth understates underlying licensee royalty growth.

How concentrated is QUALCOMM's customer base?

Concentration is high. Samsung, LG Electronics and Motorola accounted for 15%, 15% and 10% of fiscal 2004 revenue, and the three largest customers together represented 40% of consolidated revenue. Around 79% of revenue came from international customers, with South Korea (43%) and Japan (18%) the largest markets. The loss of any major customer could significantly reduce revenue.

What are the main risks to the growth outlook?

Key risks include dependence on 3G CDMA deployments (CDMA2000 1X, 1xEV-DO and WCDMA), competition from GSM/WCDMA and other technologies, supply constraints at foundry partners that limited the ability to meet some demand, and pricing pressure that tends to reduce average selling prices over time. Significant strategic investments in CDMA operators and Inquam (about $42 million carried at year end) could also produce losses, and the company faces extensive litigation, none of which has been accrued.

What does the company plan to do with its large cash position and capital allocation?

QUALCOMM held $7.6 billion in cash and marketable securities at fiscal year end. It had $834 million remaining under a $1 billion share repurchase authorization that expires in February 2005, though no shares were repurchased in fiscal 2004. Management also reported plans for capital spending on new San Diego facilities (about $250 million remaining through fiscal 2007), funding for MediaFLO USA, and acquisitions of Iridigm and Trigenix for about $193 million in cash plus stock options, along with continued quarterly dividends.

QCOM 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed November 3, 2004. Cited figures are marked; the original filing is the authoritative source.

QUALCOMM's fiscal 2004 10-K (year ended September 30, 2004) shows a company at a financial high point, with revenues of $4.88 billion^a (up 27% from $3.85 billion) and net income of $1.72 billion (diluted EPS $1.03, up from $0.51).

Growth was driven by record shipments of about 137 million MSM chips and strong royalty income from CDMA licensees, with WCDMA and 1xEV-DO adoption accelerating. Operating income rose to $2.13 billion^b, and cash plus marketable securities reached $7.6 billion, supporting a dividend that was raised twice during the year to $0.07 per quarter. Investors should weigh several items.

Royalty accounting changed in Q4 fiscal 2004: QUALCOMM stopped estimating royalties and now recognizes them only when licensees report them. This one-time change reduced reported royalty revenue, and the reported figures are not fully comparable with prior years. Customer concentration is high, with Samsung, LG and Motorola making up a large share of revenue, and supply constraints limited the company's ability to meet some customer demand.

Strategic investments in CDMA operators and Inquam remain risky, though the sale of the Brazilian Vésper operations and the Pegaso prepayment improved the cash position. Management also announced MediaFLO USA, a roughly $800 million^c, four-to-five-year commitment to build a nationwide mediacast network. Litigation is extensive, including the Zoltar patent case that QUALCOMM won, the ongoing Texas Instruments and Conexant/Skyworks/Maxim matters, and former-employee stock option suits.

The company has not accrued for these contingencies, and management believes they are without merit. Looking ahead, management expects continued growth in WCDMA and CDMA2000 and is investing heavily in R&D, which reached $720 million^d, or 15% of revenue.

02—Key points

Key Highlights

Revenue rose 27% to $4.88 billion in fiscal 2004, while net income more than tripled to $1.72 billion (diluted EPS $1.03 vs. $0.51).
Record MSM chip shipments of roughly 137 million units (vs. 99 million in fiscal 2003) drove equipment and services revenue to $3.51 billion.
Licensing and royalty revenue grew to $1.37 billion, but Q4 royalty recognition switched to an as-reported basis, reducing recorded royalties by about $151 million.
Cash, cash equivalents and marketable securities reached $7.6 billion, and operating cash flow was $2.5 billion.
Quarterly dividend was raised twice during the year, from $0.05 to $0.07 per share, with $308 million paid in fiscal 2004.
Customer concentration is high: Samsung, LG and Motorola together made up about 40% of revenue, and the three largest customers accounted for 40% in fiscal 2004.
Planned MediaFLO USA nationwide mediacast network, expected to require about $800 million over four to five years, with commercial operations starting in 2006.

03—Questions

Frequently Asked Questions

Why did QUALCOMM change how it recognizes royalty revenue, and how does it affect comparability?
Starting in Q4 fiscal 2004, QUALCOMM stopped estimating royalties for certain licensees and recognizes them only when licensees report them. Because no Q4 estimate was booked, reported royalty revenue was reduced once, by about $151 million. Royalties reported by licensees in fiscal 2004 were $1.29 billion, versus $1.14 billion recognized as revenue, so reported growth understates underlying licensee royalty growth.
How concentrated is QUALCOMM's customer base?
Concentration is high. Samsung, LG Electronics and Motorola accounted for 15%, 15% and 10% of fiscal 2004 revenue, and the three largest customers together represented 40% of consolidated revenue. Around 79% of revenue came from international customers, with South Korea (43%) and Japan (18%) the largest markets. The loss of any major customer could significantly reduce revenue.
What are the main risks to the growth outlook?
Key risks include dependence on 3G CDMA deployments (CDMA2000 1X, 1xEV-DO and WCDMA), competition from GSM/WCDMA and other technologies, supply constraints at foundry partners that limited the ability to meet some demand, and pricing pressure that tends to reduce average selling prices over time. Significant strategic investments in CDMA operators and Inquam (about $42 million carried at year end) could also produce losses, and the company faces extensive litigation, none of which has been accrued.
What does the company plan to do with its large cash position and capital allocation?
QUALCOMM held $7.6 billion in cash and marketable securities at fiscal year end. It had $834 million remaining under a $1 billion share repurchase authorization that expires in February 2005, though no shares were repurchased in fiscal 2004. Management also reported plans for capital spending on new San Diego facilities (about $250 million remaining through fiscal 2007), funding for MediaFLO USA, and acquisitions of Iridigm and Trigenix for about $193 million in cash plus stock options, along with continued quarterly dividends.

04—Continue

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