01—Abstract
Summary
Summary of the 10-K filed November 5, 2009. Cited figures are marked; the original filing is the authoritative source.
QUALCOMM's fiscal 2009 10-K (fiscal year ended September 27, 2009) shows a company whose revenue fell 6.5% to $10.4 billiona from $11.1 billion, while net income dropped roughly 50% to $1.6 billion from $3.2 billion.
The decline was driven by a 6% drop in MSM chip shipments (317 million units), a $783 millionb charge tied to the Broadcom settlement, a $230 million accrual for the Korea Fair Trade Commission fine, and $743 million in net other-than-temporary impairment losses on marketable securities. Operating income fell 40% to $2.2 billion. Despite the earnings pressure, cash, cash equivalents and marketable securities rose to $17.7 billion, and operating cash flow nearly doubled to $7.2 billion, helped by collection of a $2.5 billion licensing receivable.
The business mix remains concentrated and international. QCT (chips) contributed 59%c of revenue and QTL (licensing) 35%, with QTL earning an 85% operating margin versus about 23% for QCT. Revenue from South Korea, China and Japan made up 69% of the total, and the four largest customers accounted for 49%.
Management highlighted growth in CDMA device shipments (about 492 million units, up 14%) and 3G subscriber growth, but flagged significant regulatory risk: a Japan Fair Trade Commission cease-and-desist order, the pending European Commission investigation, and an ITC exclusion order affecting certain chip packages. For investors, the central questions are whether the licensing franchise can absorb rising legal and regulatory pressure, how quickly the chip business recovers from the 2009 inventory correction, and whether heavy R&D spending (about $2.4 billiond) will translate into LTE and OFDMA revenue. The company also continued returning capital through $1.1 billion in dividends, $285 million in buybacks, and $1.7 billion remaining under its repurchase authorization.
02—Key points
Key Highlights
- Revenue declined 6.5% to $10.42 billion (FY2008: $11.14 billion), reflecting lower MSM chip demand from channel inventory contraction and a $79 million drop in QES revenue.
- Net income fell to $1.59 billion ($0.95 diluted EPS) from $3.16 billion ($1.90 diluted EPS), hit by a $783 million Broadcom settlement charge, a $230 million KFTC fine accrual, and $743 million in net impairment losses on marketable securities.
- QTL licensing remained the profit engine: $3.61 billion in revenue at an 85% operating margin, versus QCT chips at $6.14 billion revenue and a 23% operating margin.
- Operating cash flow nearly doubled to $7.17 billion, aided by collection of a $2.5 billion licensing receivable; cash and marketable securities rose to $17.7 billion.
- Regulatory and legal exposure increased, with a Japan Fair Trade Commission cease-and-desist order (September 2009), a KFTC ruling with a fine of at least 260 billion won, an ongoing European Commission investigation, and an ITC exclusion order on certain chip packages.
- Customer concentration is high: four customers made up 49% of consolidated revenue, and South Korea, China and Japan together accounted for 69%.
- Capital returns continued with $1.09 billion in dividends (quarterly rate raised to $0.17) and $285 million in share repurchases, leaving about $1.7 billion authorized.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, Qualcomm Inc kept $0.15.
- Revenue$10.39B100.0%
- Cost of revenue−$3.02B29.1%
- Gross profit$7.36B70.9%
- Operating costs−$4.82B46.4%
- Operating income$2.54B24.5%
- Interest, other & tax−$950.0M9.1%
- Net income$1.59B15.3%
Where FY2009 revenue went
$10.39B- Cost of revenue: $3.02B, 29% of revenue
- R&D: $2.35B, 23% of revenue
- Net income: $1.59B, 15% of revenue
- SG&A: $1.46B, 14% of revenue
- Other operating costs: $1.01B, 9.8% of revenue
- Interest, other & tax: $950.0M, 9.1% of revenue
Kept 15% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed November 5, 2009Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $10.39B$11.14B | −6.8% |
| Cost of Revenue | $3.02B$3.41B | −11.4% |
| Gross Profit | $7.36B$7.73B | −4.7% |
| R&D Expenses | $2.35B$2.28B | +2.8% |
| SG&A Expenses | $1.46B$1.72B | −14.9% |
| Operating Income | $2.54B$3.73B | −31.8% |
| Interest Expense | -$13.00M$22.00M | −159.1% |
| Net Income | $1.59B$3.16B | −49.6% |
| EPS (Basic) | $0.96$1.94 | −50.5% |
| EPS (Diluted) | $0.95$1.90 | −50.0% |
| Shares Outstanding (Basic) | 1.66B1.63B | +1.5% |
| Shares Outstanding (Diluted) | 1.67B1.66B | +0.8% |
05—Questions
Frequently Asked Questions
Why did QUALCOMM's net income fall roughly 50% in fiscal 2009?
Net income fell to $1.59 billion from $3.16 billion. Major drivers were a $783 million charge to settle litigation with Broadcom, a $230 million accrual for the Korea Fair Trade Commission fine, and $743 million in net other-than-temporary impairment losses on marketable securities. Lower MSM chip shipments and softer licensing growth also weighed on results, while the prior year had benefited from a large $560 million Nokia-related licensing recognition.
How much of QUALCOMM's revenue comes from licensing versus chip sales?
In fiscal 2009, the QCT chip segment produced $6.14 billion (59% of revenue) and the QTL licensing segment produced $3.61 billion (35%). QWI, which covers enterprise services, internet services and government, contributed $641 million (6%), and QSI contributed $29 million. QTL carries far higher margins, with an 85% operating margin compared with 23% for QCT.
What are the most significant legal and regulatory risks disclosed?
The most significant risks are the Japan Fair Trade Commission cease-and-desist order requiring changes to certain license provisions, the Korea Fair Trade Commission ruling with a fine of at least 260 billion won, an active European Commission investigation that could lead to fines or practice changes, and an ITC order barring importation of certain chip packages into the US, which the company is mitigating by sourcing from a licensed supplier (Amkor). Management says it believes its practices are lawful but expects these challenges to continue and to require substantial legal spending.
Is QUALCOMM's dividend and buyback program still intact?
Yes. The company paid $1.09 billion in dividends in fiscal 2009 and raised its quarterly dividend to $0.17 per share in March 2009, with another $0.17 declared in October 2009. Share repurchases were limited to $285 million in fiscal 2009, and about $1.7 billion remained authorized at fiscal year-end. Management notes that future dividends and repurchases depend on capital availability and board determinations.
What drives QUALCOMM's long-term growth outlook according to the filing?
Growth is expected to come from continued 3G CDMA adoption, including CDMA2000, WCDMA/HSPA and TD-SCDMA; the transition toward OFDMA-based LTE, where the company has substantial IP and nine licensees for single-mode OFDMA products; and new product lines such as Snapdragon, Gobi modems, FLO TV and the mirasol display. The company also flagged that some of its fiscal 2010 R&D will not reach commercialization for several years, and that revenue from these new areas is uncertain.
06—Continue