01—Abstract
Summary
Summary of the 10-K filed November 8, 2007. Cited figures are marked; the original filing is the authoritative source.
QUALCOMM's fiscal 2007 10-K (52-53 week year ended September 30, 2007, which included 53 weeks) reports record results: revenues of $8.87 billiona (up 18% from $7.53 billion), operating income of $2.88 billion, and net income of $3.30 billion, or $1.95 per diluted share, versus $2.47 billion in fiscal 2006.
Revenue is split across QCT chipsets ($5.28 billionb, 59% of total), QTL licensing and royalties ($2.77 billion segment revenue, about 31% of total), and QWI services and other businesses. Net income was lifted by a $331 million tax benefit from closing IRS audits, which pushed the effective tax rate down to 9%. Cash, cash equivalents and marketable securities reached $11.8 billion, and the company returned capital through $1.5 billion of buybacks and $862 million of dividends.
The filing also flags material risk. Royalty revenue is under pressure from the Nokia dispute, where QUALCOMM is not recording royalties on Nokia sales after April 9, 2007 pending arbitration. Broadcom litigation includes an ITC exclusion order, with a stay in place, and a jury verdict of about $20 millionc that has been expensed.
The European Commission, Korea Fair Trade Commission and Japan Fair Trade Commission are all reviewing QUALCOMM's licensing practices. Three customers accounted for 41%d of revenue, and 87% of revenue came from international customers, concentrated in South Korea, China and Japan. For investors, the central question is whether the licensing model holds up.
Fiscal 2007 shows strong growth in CDMA handset shipments (338 million units, up 34%) and 3G subscriber growth to about 530 million. Those gains depend on continued 3G deployments, the outcome of the antitrust reviews, and the resolution of the Nokia and Broadcom disputes, all of which remain open at filing.
02—Key points
Key Highlights
- Record fiscal 2007 revenue of $8.87B (+18% YoY) and net income of $3.30B (+34% YoY); diluted EPS of $1.95 versus $1.44 in fiscal 2006.
- QTL licensing segment earned $2.34B pre-tax at an 84% operating margin, while QCT chipset revenue reached $5.28B on 253 million MSM shipments (+22%).
- Net income was boosted by a $331M tax benefit from IRS audit settlements; the effective tax rate fell to 9% from 22%, so underlying profitability growth was lower than the headline figure.
- Nokia royalty dispute: no royalty revenue is recognized on Nokia sales after April 9, 2007 pending arbitration, which is a direct headwind to QTL revenue.
- Antitrust and litigation exposure: EC, KFTC and JFTC investigations are open, the Broadcom ITC exclusion order is stayed on appeal, and the Broadcom jury verdict of about $20M is expensed.
- Strong balance sheet and shareholder returns: $11.8B in cash and marketable securities, $1.5B in share repurchases and $862M in dividends, with the quarterly dividend raised to $0.14.
- Concentration risk: three customers (LG, Motorola, Samsung) represent 41% of revenue, and roughly 69% of revenue comes from South Korea, Japan and China.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2007, Qualcomm Inc kept $0.37.
- Revenue$8.87B100.0%
- Cost of revenue−$2.68B30.2%
- Gross profit$6.19B69.8%
- Operating costs−$3.31B37.3%
- Operating income$2.88B32.5%
- Interest, other & tax$420.0M4.7%
- Net income$3.30B37.2%
Where FY2007 revenue went
$8.87B- Operating income: $2.88B, 32% of revenue
- Cost of revenue: $2.68B, 30% of revenue
- R&D: $1.83B, 21% of revenue
- SG&A: $1.48B, 17% of revenue
Kept 32% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2007filed November 8, 2007Financial Statements
| Revenue | $8.87B |
| Cost of Revenue | $2.68B |
| Gross Profit | $6.19B |
| R&D Expenses | $1.83B |
| SG&A Expenses | $1.48B |
| Operating Income | $2.88B |
| Net Income | $3.30B |
| EPS (Basic) | $1.99 |
| EPS (Diluted) | $1.95 |
| Shares Outstanding (Basic) | 1.66B |
| Shares Outstanding (Diluted) | 1.69B |
05—Questions
Frequently Asked Questions
How did QUALCOMM perform financially in fiscal 2007?
Revenue rose 18% to $8.87B and net income rose 34% to $3.30B, or $1.95 per diluted share. Operating income grew about 7% to $2.88B, a smaller increase than revenue, because R&D rose to $1.83B and SG&A to $1.48B. Fiscal 2007 also had 53 weeks, which modestly flattered comparisons. The net income gain was helped by a $331M tax benefit from audit settlements and a low 9% effective tax rate.
What is driving the company's growth?
CDMA handset shipments grew 34% to about 338 million units, and QUALCOMM shipped about 253 million MSM chipsets, up 22%. Growth in high-end WCDMA and CDMA2000 products and the shift in geographic mix supported royalty growth of about $306M, bringing QTL royalties reported by licensees to $2.72B. QCT revenue increased $922M, mostly from higher unit volumes.
What are the biggest risks to investors?
The main risks are the Nokia dispute, which has already cut royalty recognition and could eliminate Nokia's license rights if QUALCOMM loses the arbitration; the Broadcom litigation, including the ITC exclusion order that could affect chip sales; and the EC, KFTC and JFTC antitrust reviews, which could lead to fines or required changes to the licensing model. Customer concentration, with three customers at 41% of revenue, and dependence on continued 3G deployment and on GSM operators migrating to WCDMA are also significant.
How is QUALCOMM returning capital to shareholders?
During fiscal 2007 the company repurchased and retired 37.3 million shares for $1.5B under a $3.0B program authorized in May 2007, with about $1.5B remaining as of September 30, 2007. Dividends paid totaled $862M, or $0.52 per share, and the quarterly dividend was raised to $0.14 in March 2007. Management says it intends to keep paying quarterly dividends, but it does not guarantee the amount.
What does the 3G and OFDMA outlook look like?
By September 2007, about 530 million 3G subscribers were on CDMA networks, including roughly 160 million on WCDMA/HSPA. More than 180 operators have launched WCDMA networks and more than 140 have launched HSDPA. OFDMA-based technologies such as LTE, UMB and WiMAX are the next step, and QUALCOMM has filed over 1,400 U.S. OFDMA patent applications. Commercial adoption of OFDMA is still early, and the company says part of its fiscal 2008 R&D will not reach commercialization for several years.
06—Continue