01—Abstract
Summary
Summary of the 10-K filed November 6, 2008. Cited figures are marked; the original filing is the authoritative source.
QUALCOMM's fiscal 2008 10-K (fiscal year ended September 28, 2008) shows a company at a financial high point, with revenue up 26% to $11.14 billiona and net income of $3.16 billion, or $1.90 per diluted share.
Growth was driven by strong CDMA device volumes (about 433 million CDMA-based units shipped, up 28%) and WCDMA adoption. Operating income rose 29% to $3.73 billionb, and licensing and royalty revenue reached $3.98 billion. Results were lifted by a $560 million recognition related to the new Nokia license and settlement agreement, which also produced a $2.5 billion upfront payment (received in October 2008) and $3.9 billion of unearned revenue to be recognized over roughly 14 years.
Net income was held back by $502 millionc of other-than-temporary impairment losses on marketable securities, and investment income fell sharply to $96 million from $743 million. The balance sheet strengthened, with total assets of $24.6 billion and stockholders' equity of $17.9 billion, although cash and marketable securities declined slightly to $11.3 billion. Unrealized losses on the securities portfolio widened to roughly $1.3 billion by October 31, 2008, reflecting the credit market disruption, and management characterizes these as temporary.
The company repurchased $1.7 billiond of stock, paid $982 million in dividends, and raised the quarterly dividend to $0.16. A new $2.0 billion repurchase authorization was in place with no shares bought under it by year-end. The main investor concerns are legal and regulatory.
Broadcom litigation includes an ITC exclusion order and contempt proceedings, and the European Commission, Korea Fair Trade Commission, and Japan Fair Trade Commission are all investigating QUALCOMM's licensing practices. Concentration is also high: two customers, LG Electronics and Samsung, together represented 30% of revenue, and South Korea, China, and Japan supplied 70% of revenue. Management has not recorded accruals for most of these matters, so an adverse outcome could materially affect results.
02—Key points
Key Highlights
- Revenue grew 26% to $11.14B (from $8.87B), and net income rose to $3.16B, or $1.90 diluted EPS (down from $3.30B net income in FY2007 due to lower investment income and tax effects).
- Licensing and royalty fees reached $3.98B (up 28%), including $560M recognized from the new Nokia agreement; the Nokia deal also brought a $2.5B upfront payment and $3.9B of deferred revenue.
- QCT shipped about 336M MSM chips (up 33%); CDMA-based device shipments reached roughly 433M units (up 28%), with 3G subscribers near 705M.
- Net investment income fell to $96M from $743M, primarily due to $502M in other-than-temporary impairments on marketable securities.
- Concentration risk remains high: two customers accounted for 30% of revenue, and South Korea, China, and Japan accounted for 70% of revenue.
- Pending legal and regulatory matters, including the Broadcom litigation, EC, KFTC, and JFTC investigations, carry potential material adverse outcomes, and no accrual has been recorded for most of them.
- Capital returns: $1.7B of buybacks, $982M of dividends paid, quarterly dividend increased to $0.16, and a new $2.0B repurchase authorization in place.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, Qualcomm Inc kept $0.28.
- Revenue$11.14B100.0%
- Cost of revenue−$3.41B30.6%
- Gross profit$7.73B69.4%
- Operating costs−$4.00B35.9%
- Operating income$3.73B33.5%
- Interest, other & tax−$570.0M5.1%
- Net income$3.16B28.4%
Where FY2008 revenue went
$11.14B- Cost of revenue: $3.41B, 31% of revenue
- Net income: $3.16B, 28% of revenue
- R&D: $2.28B, 20% of revenue
- SG&A: $1.72B, 15% of revenue
- Interest, other & tax: $570.0M, 5.1% of revenue
Kept 28% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed November 6, 2008Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $11.14B$8.87B | +25.6% |
| Cost of Revenue | $3.41B$2.68B | +27.3% |
| Gross Profit | $7.73B$6.19B | +24.8% |
| R&D Expenses | $2.28B$1.83B | +24.7% |
| SG&A Expenses | $1.72B$1.48B | +16.2% |
| Operating Income | $3.73B$2.88B | +29.4% |
| Interest Expense | $22.00M— | — |
| Net Income | $3.16B$3.30B | −4.3% |
| EPS (Basic) | $1.94$1.99 | −2.5% |
| EPS (Diluted) | $1.90$1.95 | −2.6% |
| Shares Outstanding (Basic) | 1.63B1.66B | −1.7% |
| Shares Outstanding (Diluted) | 1.66B1.69B | −1.9% |
05—Questions
Frequently Asked Questions
How much of fiscal 2008's revenue growth came from the Nokia settlement?
The Nokia agreement contributed $560 million in licensing and royalty revenue recognized in fiscal 2008. Excluding that amount, revenue would still have grown significantly, since total revenue rose $2.27 billion year over year, driven mainly by higher integrated circuit shipments and royalties from non-Nokia licensees.
Why did net investment income fall so sharply?
Net investment income dropped to $96 million from $743 million, mainly because of $502 million in other-than-temporary losses on marketable securities, reflecting depressed values during the 2008 credit market disruption. Lower interest rates and lower net realized gains also contributed.
What are the biggest legal risks investors should watch?
The Broadcom litigation is the most active, with an injunction on certain WCDMA and EV-DO products, contempt motions, and ITC proceedings that could affect chipset and licensing revenue. The European Commission, Korea Fair Trade Commission, and Japan Fair Trade Commission are also investigating licensing practices. The company says the claims are without merit but acknowledges that an adverse outcome could have a material impact.
How concentrated is QUALCOMM's revenue?
Concentration is significant. Two customers, LG Electronics and Samsung Electronics, each represented more than 10% of consolidated revenue and together accounted for 30%. Geographically, 91% of revenue came from international customers, and South Korea, China, and Japan contributed 70%.
Is the dividend and buyback program sustainable?
The company paid $982 million in dividends and repurchased $1.7 billion of stock in fiscal 2008, while generating $3.56 billion in operating cash flow and holding $11.3 billion in cash and marketable securities. However, $6.8 billion of cash is held by foreign subsidiaries, and the company says future dividends depend on capital availability and board determinations.
06—Continue