How concentrated is Qualcomm's revenue among customers and geographies?

Revenue is concentrated in a small number of customers and regions. Two customers of the QCT and QTL segments each accounted for 13% of fiscal 2011 consolidated revenue, and Samsung and HTC were each above 10%. By geography, China generated 32% of revenue, South Korea 19%, Taiwan 17% and Japan 8%, and international customers accounted for 94% of total revenue. The risk factors state that this concentration will persist until QCT diversifies its customer base.

What is the risk to the India BWA spectrum investment, and what happens next?

Qualcomm paid $1.1 billion for 20 MHz of BWA spectrum in four Indian telecom circles ($994 million carrying value at September 25, 2011). In September 2011 the DoT rejected its license applications, arguing they were filed late and that only one application was permitted rather than four. The company has petitioned the TDSAT, which granted interim relief barring the DoT from reassigning the spectrum or forfeiting the payment. In October 2011 the DoT offered a license covering all of India, which the subsidiary accepted, and further hearings were scheduled. If Qualcomm does not prevail, it may lose the spectrum and may not recover its payment. Lenders could also accelerate about $994 million in loans if the rejection is deemed a default, but they have waived that right until at least April 1, 2012.

What drove the strong licensing (QTL) results, and is that sustainable?

QTL revenue rose to $5.42 billion from $3.66 billion, driven by higher CDMA device sales by licensees, higher average royalties per unit for CDMA devices, and a $401 million catch-up from settlements with two licensees, including a Panasonic arbitration. Reported total device sales rose about 41% to $149.5 billion. The sustainability question is more nuanced: the filing warns that royalty rates for LTE and WiMAX products are generally lower than for 3G products, that some licenses cover only earlier-filed patents, and that a few companies continue to challenge royalties through litigation, regulatory complaints and proposed changes to standards-body IP policies.

What are the main regulatory and legal overhangs disclosed in the filing?

Several matters are pending. The SEC has a formal order of private investigation stemming from a whistleblower complaint, although the audit committee's internal review found no errors in the financial statements. The European Commission is conducting a preliminary investigation of an Icera complaint alleging anticompetitive conduct. The Japan Fair Trade Commission issued a cease-and-desist order concerning licensing terms, which is stayed pending an administrative hearing. The Korea Fair Trade Commission fine ($230 million, recorded in fiscal 2009) is under appeal. Patent litigation includes Tessera (with a Supreme Court petition pending), MicroUnity against Snapdragon products (trial scheduled for June 2013) and the Broadcom/CSIRO and MOSAID cases involving Atheros. Qualcomm has recorded no accrual for these matters, deeming losses possible but not probable.

What is the outlook for the FLO TV exit and the 700 MHz spectrum sale?

The FLO TV business and network were shut down on March 27, 2011, and its results are reported as discontinued operations, producing a $313 million after-tax loss in fiscal 2011. Qualcomm agreed to sell substantially all of its 700 MHz spectrum to AT&T for $1.9 billion, subject to FCC approval. The spectrum has a $746 million carrying value and is classified as held for sale. If the sale closes, Qualcomm expects a gain of about $1.2 billion in discontinued operations. The FCC has coordinated its review with the AT&T/T-Mobile merger review, and the agreement expires January 13, 2012 unless extended, so timing and conditions carry real uncertainty. Restructuring charges are expected to total up to $25 million more, with cash outlays of $75 million to $115 million.

QCOM 10-K FY2011 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed November 2, 2011. Cited figures are marked; the original filing is the authoritative source.

QUALCOMM's fiscal 2011 10-K (fiscal year ended September 25, 2011) shows a company at a financial high point: revenues rose 36% to $14.96 billion^a, operating income grew 35% to $5.03 billion, and net income attributable to Qualcomm reached $4.26 billion ($2.52 diluted EPS).

Growth was driven by the 3G/CDMA device cycle, with 483 million MSM chip shipments (up 21%), estimated CDMA-based handset unit growth of 28%, and a $1.76 billion^b increase in QTL licensing revenue that included a $401 million catch-up from settled licensee disputes. QTL, the licensing segment, earned a remarkable 88% operating margin, and the company's cash, cash equivalents and marketable securities reached $20.9 billion. The filing also flags several items that investors should weigh.

The Atheros acquisition ($3.1 billion^c net cash, closed May 2011) expanded QCT into WLAN and networking, and the company recorded a $114 million goodwill impairment on its Firethorn/SWAGG mobile commerce unit after weak consumer adoption. The FLO TV business was shut down in March 2011, with the 700 MHz spectrum sale to AT&T ($1.9 billion, pending FCC approval) expected to produce a roughly $1.2 billion gain. Management disclosed a $994 million India BWA spectrum position whose licenses were rejected by the Indian DoT in September 2011, and it is being contested before the TDSAT, with bank waivers in place only through April 2012.

Ongoing regulatory and legal matters include an SEC formal investigation, European Commission and Japan Fair Trade Commission proceedings, and several patent suits. Concentration and structural risks remain significant. Revenue is highly dependent on a few customers (two customers each represented 13%^d of fiscal 2011 revenue), and China, South Korea, Taiwan and Japan together generated about 76% of revenue.

QCT is fabless and relies on third-party foundries and assemblers, and the company's licensing model faces continuing challenges from some licensees, regulators and standards-related policy proposals. Management intends to keep paying quarterly dividends ($0.215 per share, up from $0.19) and to continue repurchasing shares, with about $1.0 billion of authorization remaining.

02—Key points

Key Highlights

Revenue grew 36% to $14.96 billion, with QCT contributing $8.86 billion (59% of revenue) and QTL contributing $5.42 billion (36%), which included a $401 million settlement-related catch-up.
Net income attributable to Qualcomm rose 31% to $4.26 billion, and diluted EPS reached $2.52, up from $1.96 in fiscal 2010.
QTL achieved an 88% operating margin, reflecting the high-margin nature of the patent licensing model, while QCT's operating margin declined to 23% from 25% on lower gross margins.
Atheros acquisition closed May 2011 for $3.1 billion net cash, expanding QCT into WLAN, Bluetooth, Ethernet and powerline connectivity, and adding $1.78 billion of goodwill.
The FLO TV business was shut down, and the $1.9 billion 700 MHz spectrum sale (pending FCC approval, with a roughly $1.2 billion expected gain) is a material near-term catalyst.
The $994 million India BWA spectrum investment is at risk after the DoT rejected the company's license applications in September 2011; the company is litigating, and bank loan waivers run only through April 1, 2012.
Cash, cash equivalents and marketable securities totaled $20.9 billion, and the company paid $1.3 billion in dividends and intends to continue quarterly dividends at $0.215 per share.

03—One dollar

Follow one dollar

Of each $1.00 of revenue in FY2011, Qualcomm Inc kept $0.28.

Revenue$14.96B100.0%100.0%
Cost of revenue−$4.88B32.6%32.6%
Gross profit$10.08B67.4%67.4%
Operating costs−$5.05B33.8%33.8%
Operating income$5.03B33.6%33.6%
Interest, other & tax−$766.0M5.1%5.1%
Net income$4.26B28.5%28.5%

10-KFY2011filed November 2, 2011Computed from this filing’s revenue, gross profit, operating income and net income · right columngrey figure: share of revenue

Where FY2011 revenue went

$14.96B

Cost of revenue: $4.88B, 33% of revenue
Net income: $4.26B, 28% of revenue
R&D: $3.00B, 20% of revenue
SG&A: $1.95B, 13% of revenue
Other operating costs: $114.0M, 0.8% of revenue
Interest, other & tax: $766.0M, 5.1% of revenue

Kept 28% as net incomeOther operating costs $114.0M · 0.8%

Full revenue history →

04—Financials

Financial Highlights

10-KFY2011filed November 2, 2011

Revenue$14.96B67.4% Gross Margin Net Income$4.26B28.5% Net Margin EPS (Diluted)$2.52 Total Assets$36.42B Cash & Equivalents$5.46B Free Cash Flow$4.90B

Financial Statements

FY2011 against FY2010

Line item	FY2011FY2010	FY2010	Change
Revenue	$14.96B$10.98B	$10.98B	+36.2%
Cost of Revenue	$4.88B$3.30B	$3.30B	+47.7%
Gross Profit	$10.08B$7.68B	$7.68B	+31.2%
R&D Expenses	$3.00B$2.45B	$2.45B	+22.2%
SG&A Expenses	$1.95B$1.50B	$1.50B	+29.4%
Operating Income	$5.03B$3.73B	$3.73B	+34.9%
Interest Expense	$114.00M$43.00M	$43.00M	+165.1%
Net Income	$4.26B$3.25B	$3.25B	+31.2%
EPS (Basic)	$2.57$1.98	$1.98	+29.8%
EPS (Diluted)	$2.52$1.96	$1.96	+28.6%
Shares Outstanding (Basic)	1.66B1.64B	1.64B	+0.9%
Shares Outstanding (Diluted)	1.69B1.66B	1.66B	+2.0%

05—Questions

Frequently Asked Questions

How concentrated is Qualcomm's revenue among customers and geographies?
Revenue is concentrated in a small number of customers and regions. Two customers of the QCT and QTL segments each accounted for 13% of fiscal 2011 consolidated revenue, and Samsung and HTC were each above 10%. By geography, China generated 32% of revenue, South Korea 19%, Taiwan 17% and Japan 8%, and international customers accounted for 94% of total revenue. The risk factors state that this concentration will persist until QCT diversifies its customer base.
What is the risk to the India BWA spectrum investment, and what happens next?
Qualcomm paid $1.1 billion for 20 MHz of BWA spectrum in four Indian telecom circles ($994 million carrying value at September 25, 2011). In September 2011 the DoT rejected its license applications, arguing they were filed late and that only one application was permitted rather than four. The company has petitioned the TDSAT, which granted interim relief barring the DoT from reassigning the spectrum or forfeiting the payment. In October 2011 the DoT offered a license covering all of India, which the subsidiary accepted, and further hearings were scheduled. If Qualcomm does not prevail, it may lose the spectrum and may not recover its payment. Lenders could also accelerate about $994 million in loans if the rejection is deemed a default, but they have waived that right until at least April 1, 2012.
What drove the strong licensing (QTL) results, and is that sustainable?
QTL revenue rose to $5.42 billion from $3.66 billion, driven by higher CDMA device sales by licensees, higher average royalties per unit for CDMA devices, and a $401 million catch-up from settlements with two licensees, including a Panasonic arbitration. Reported total device sales rose about 41% to $149.5 billion. The sustainability question is more nuanced: the filing warns that royalty rates for LTE and WiMAX products are generally lower than for 3G products, that some licenses cover only earlier-filed patents, and that a few companies continue to challenge royalties through litigation, regulatory complaints and proposed changes to standards-body IP policies.
What are the main regulatory and legal overhangs disclosed in the filing?
Several matters are pending. The SEC has a formal order of private investigation stemming from a whistleblower complaint, although the audit committee's internal review found no errors in the financial statements. The European Commission is conducting a preliminary investigation of an Icera complaint alleging anticompetitive conduct. The Japan Fair Trade Commission issued a cease-and-desist order concerning licensing terms, which is stayed pending an administrative hearing. The Korea Fair Trade Commission fine ($230 million, recorded in fiscal 2009) is under appeal. Patent litigation includes Tessera (with a Supreme Court petition pending), MicroUnity against Snapdragon products (trial scheduled for June 2013) and the Broadcom/CSIRO and MOSAID cases involving Atheros. Qualcomm has recorded no accrual for these matters, deeming losses possible but not probable.
What is the outlook for the FLO TV exit and the 700 MHz spectrum sale?
The FLO TV business and network were shut down on March 27, 2011, and its results are reported as discontinued operations, producing a $313 million after-tax loss in fiscal 2011. Qualcomm agreed to sell substantially all of its 700 MHz spectrum to AT&T for $1.9 billion, subject to FCC approval. The spectrum has a $746 million carrying value and is classified as held for sale. If the sale closes, Qualcomm expects a gain of about $1.2 billion in discontinued operations. The FCC has coordinated its review with the AT&T/T-Mobile merger review, and the agreement expires January 13, 2012 unless extended, so timing and conditions carry real uncertainty. Restructuring charges are expected to total up to $25 million more, with cash outlays of $75 million to $115 million.

06—Continue

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