01—Abstract
Summary
Summary of the 10-K filed November 3, 2010. Cited figures are marked; the original filing is the authoritative source.
QUALCOMM's fiscal 2010 10-K (fiscal year ended September 26, 2010) shows a company whose revenue base is split between a chipset business (QCT) and a high-margin patent licensing business (QTL).
Total revenue rose about 5.5% to $10.99 billiona from $10.42 billion, and net income more than doubled to $3.25 billion from $1.59 billion. That jump was helped by the absence of fiscal 2009's $783 million Broadcom settlement charge and $230 million Korean fine, and by a swing in investment income from a $150 million loss to $751 million of income. Operating income rose to $3.28 billion from $2.23 billion, with QCT contributing $1.69 billion of pre-tax earnings and QTL $3.02 billion.
The filing points to strong volume growth alongside pressure on pricing and rising costs. QCT shipped about 399 million MSM chips, up 26%, but its gross margin benefited from lower unit costs rather than higher prices. Research and development spending reached $2.55 billionb, or 23% of revenue, and management expects heavy continued investment.
The company is also exiting the FLO TV mobile broadcast service, with restructuring charges of $125c–175 million expected in fiscal 2011, and it is taking on a $1.1 billion Indian-rupee bank loan to fund a BWA spectrum license it won in India. Cash, equivalents and marketable securities total $18.4 billion, but $12.1 billion of that is held by foreign subsidiaries, which matters for capital returns because the domestic cash must also cover a $1.4 billion Nokia-related tax payment.
Investors should weigh the company's dominant CDMA patent position and cash generation against several overhangs: multiple antitrust proceedings in Korea, Japan and the European Commission, the Panasonic royalty arbitration (for which revenue recognition has been deferred), an SEC formal investigation opened in September 2010, and the Tessera ITC matter. Management says it does not expect these to be material, though the company has not recorded accruals for most of them.
02—Key points
Key Highlights
- Revenue rose 5.5% to $10.99 billion, and net income rose 104% to $3.25 billion, or $1.96 diluted EPS, versus $0.95 in fiscal 2009, which had large one-time charges.
- QCT (chips) revenue grew 9% to $6.70 billion, with MSM shipments up 26% to about 399 million units and an operating margin of 25%.
- QTL (licensing) generated $3.66 billion of revenue at an 83% operating margin, making it the most profitable segment and about a third of total revenue.
- Investment income swung to $751 million of income from a $150 million loss, reflecting far lower impairments ($111 million versus $743 million in fiscal 2009).
- Capital returned in fiscal 2010 totaled about $4.2 billion: $3.0 billion of buybacks (79.8 million shares) and $1.2 billion of dividends, with the quarterly dividend raised to $0.19 and $1.7 billion of repurchase authorization remaining.
- FLO TV is being wound down with $125–175 million of restructuring charges expected in fiscal 2011, and the $1.1 billion India BWA spectrum purchase is financed by a short-term loan that must be repaid in December 2010.
- Legal and regulatory overhangs include the Korea KFTC fine, the Japan JFTC cease-and-desist order, a European Commission complaint from Icera, the Panasonic arbitration, and a new SEC formal investigation.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, Qualcomm Inc kept $0.30.
- Revenue$10.98B100.0%
- Cost of revenue−$3.30B30.1%
- Gross profit$7.68B69.9%
- Operating costs−$3.95B36.0%
- Operating income$3.73B33.9%
- Interest, other & tax−$480.0M4.4%
- Net income$3.25B29.6%
Where FY2010 revenue went
$10.98B- Cost of revenue: $3.30B, 30% of revenue
- Net income: $3.25B, 30% of revenue
- R&D: $2.45B, 22% of revenue
- SG&A: $1.50B, 14% of revenue
- Interest, other & tax: $480.0M, 4.4% of revenue
Kept 30% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2010filed November 3, 2010Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $10.98B$10.39B | +5.7% |
| Cost of Revenue | $3.30B$3.02B | +9.1% |
| Gross Profit | $7.68B$7.36B | +4.3% |
| R&D Expenses | $2.45B$2.35B | +4.5% |
| SG&A Expenses | $1.50B$1.46B | +2.8% |
| Operating Income | $3.73B$2.54B | +46.6% |
| Interest Expense | $43.00M-$13.00M | +430.8% |
| Net Income | $3.25B$1.59B | +104.0% |
| EPS (Basic) | $1.98$0.96 | +106.3% |
| EPS (Diluted) | $1.96$0.95 | +106.3% |
| Shares Outstanding (Basic) | 1.64B1.66B | −0.8% |
| Shares Outstanding (Diluted) | 1.66B1.67B | −0.9% |
05—Questions
Frequently Asked Questions
Why did net income more than double in fiscal 2010?
Fiscal 2009 absorbed a $783 million charge for the Broadcom settlement and a $230 million Korean fine, and investment losses were $150 million. Fiscal 2010 had neither the same charges nor such large impairments ($111 million), and investment income was $751 million. Operating income rose 47% to $3.28 billion, and net income reached $3.25 billion.
How dependent is QUALCOMM on a small number of customers and licensees?
Heavily. Two customers, LG Electronics and Samsung, each exceeded 10% of revenue. Together they accounted for roughly 25% of fiscal 2010 revenue, down from 31% in fiscal 2009. Revenue from outside the US was about 95%, with China at 29% and South Korea at 27%. Three customers made up 42% of gross receivables at year-end.
What is the risk from the Panasonic arbitration and the other antitrust matters?
Panasonic seeks lower royalties and the return of payments made, and QUALCOMM has deferred recognizing some Panasonic royalty revenue. An October 2010 interim order found QUALCOMM did not breach the license. The Korean fine has been accrued, the Japanese order is stayed pending a hearing, and the European complaint is at a preliminary stage. The company says none of these is expected to be material, but it has recorded no accrual for most of them, and an adverse outcome could affect licensing revenue.
Why is QUALCOMM exiting FLO TV, and what does it cost?
The FLO TV mobile broadcast business has not generated operating income. Its assets totaled $1.3 billion, including $746 million of spectrum licenses. Management expects $125–175 million of restructuring charges and $160–210 million of cash costs in fiscal 2011, and continues to evaluate alternatives such as a wholesale model, a sale or joint venture, or selling the spectrum. Additional impairments are possible.
06—Continue