Management`s Discussions: 10-Q, QUALCOMM INC 1 of 2
(Edgar Online via COMTEX)
Company Name: QUALCOMM INC
(SYMBOL:QCOM)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
This information should be read in conjunction with the condensed consolidated
financial statements and the notes thereto included in Item 1 of Part I of this
Quarterly Report and the audited consolidated financial statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations for the year ended September 24, 2000 contained in the
Company's 2000 Annual Report on Form 10-K.
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties.
QUALCOMM's future results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
specifically limited to: potential declines in the rate of growth in the CDMA
subscriber base; risks associated with the scale-up, acceptance and operations
of CDMA systems, including high data rate, now known as cdma2000 1xEV
(previously HDR), and 3G technology; potential component shortages including
shortage of supplier manufacturing capacity; risks associated with strategic
opportunities or acquisitions, divestitures and investments the Company may
pursue, including investments in new ventures and operators, and the proposed
spin-off of its integrated circuit and system software business; risks relating
to the success of the Globalstar business; developments in current or future
litigation; the ability to develop and introduce cost effective new products in
a timely manner; the Company's ability to effectively manage growth; the intense
competition in the wireless communications industry; risks associated with the
timing and collection of license fees and royalties; risks associated with
international business activities; risks associated with macroeconomic trends
worldwide; and risks related to accounts receivable and finance receivables, as
well as the other risks detailed in the Company's Form 10-K for fiscal year
ended September 24, 2000. The Company's consolidated financial data includes
SnapTrack, Inc. and other consolidated subsidiaries of the Company.
OVERVIEW
QUALCOMM designs, develops, manufactures and markets digital wireless
communications products and services based on its CDMA and other technologies.
The Company licenses and receives royalty payments on its CDMA technology from
major domestic and international telecommunications equipment suppliers.
QUALCOMM is a leading developer and supplier worldwide of CDMA-based wireless
communication integrated circuits and system software solutions for voice and
data communications products and services. In addition, the Company designs,
manufactures and distributes products and provides services for its OmniTRACS
system. On July 25, 2000, QUALCOMM announced the proposed spin-off and initial
public offering (IPO) of its integrated circuits and system software solutions
business. In connection with this announcement, QUALCOMM filed a Current Report
on Form 8-K dated July 25, 2000. Given current uncertainties in the financial
markets, the Company is evaluating the need for and timing of an IPO. Regardless
of the IPO decision, the Company continues to plan for the spin-off and full
distribution of the shares of QUALCOMM Spinco, Inc. (QUALCOMM Spinco), a
wholly-owned subsidiary of QUALCOMM formed as part of the proposed spin-off,
expected to occur by the fall of 2001, subject to approval by QUALCOMM's Board
of Directors and other factors.
The Company has contracts with Globalstar LP (Globalstar) to design, develop and
manufacture subscriber products and ground communications equipment. On January
16, 2001, Globalstar announced that, in order to have sufficient funds available
for the continued progress of its marketing and service activities, it has
suspended indefinitely principal and interest payments on all of its debt,
including its vendor financing obligations. As a result, Globalstar did not make
an approximate $22 million payment for principal and interest due to QUALCOMM on
January 15, 2001. Globalstar also announced the retention of a financial adviser
to assist in developing future initiatives, including
restructuring Globalstar's debt, identifying funding opportunities and pursuing
other strategic alternatives. As a result of these recent developments, QUALCOMM
has assessed the recoverability of all assets and considered probable exposures
related to the Globalstar business. The Company has recorded charges of $48
million in cost of revenues, $481 million in asset impairment and related
charges, $10 million in investment expense and $57 million in other
non-operating charges related primarily to the impairment of certain assets. At
December 31, 2000, the Company has approximately $56 million in net assets
remaining, primarily consisting of certain finance receivables, accounts
receivable, inventory and fixed assets related to the Globalstar business. The
Company also decided to not recognize revenue on business with Globalstar before
cash is received starting in the first quarter of fiscal 2001 until the
collectibility of receivables can be reasonably assured. The Company expects its
Globalstar-related revenues to be significantly lower for the balance of fiscal
2001 than the comparable periods of the prior year despite on-going sales of
equipment and services to support both continued operations and the addition of
high-speed data capability.
The Company intends to continue its strategic investment activities to promote
the worldwide adoption of CDMA products and the growth of CDMA-based wireless
data and CDMA-based wireless Internet products and solutions. In general, the
Company enters into strategic relationships with CDMA carriers and companies
that have developed or are developing innovative technologies or products for
the wireless industry. QUALCOMM enters into joint ventures with strategic
partners that are designed to increase wireless usage and dependence on wireless
devices. As part of these investment activities, QUALCOMM may provide financing
to facilitate the marketing and sale of CDMA equipment by authorized suppliers.
QUALCOMM also, from time-to-time, makes investments in entities such as venture
funds or incubators focused on the wireless market. In November 2000, QUALCOMM
announced the formation of QUALCOMM Ventures, an organization that will make
strategic investments in early stage companies globally to support the adoption
of CDMA and use of the wireless Internet. QUALCOMM made a $500 million
commitment to this strategic initiative that is expected to be invested over a
period of four years. Most of the Company's strategic investments are illiquid
securities that have a high degree of risk. Such securities generally will not
become liquid until more than one year from the date of investment, if at all.
To the extent that such investments do become liquid, QUALCOMM will attempt to
make regular periodic sales that will be recognized in net investment income. It
is likely that some portion of these investments will never become liquid and
that QUALCOMM may be required to recognize losses from time to time in the
future as it determines that impairment in the value of particular investments
have become other than temporary.
In October 2000, the Company agreed to invest $200 million in the convertible
preferred shares of Inquam Limited (Inquam). Inquam was formed to acquire, own,
develop and manage wireless telecommunication systems, either directly or
indirectly, with the primary intent of deploying CDMA-based technology. See
"Notes to Condensed Consolidated Financial StatementsNote 5 Investments in Other
Entities."
In December 2000, QUALCOMM announced a new CDMA license program designed to
allow selected early stage companies to issue equity to QUALCOMM as a means of
paying part of the up-front fees payable under QUALCOMM's CDMA license
agreements. The Company records license fee revenues based on the fair value of
the equity instruments received. The measurement date for determination of fair
value is the earlier of the date on which the parties sign a written agreement
documenting a commitment to perform or the date at which the performance is
complete. The evaluation procedures used to determine fair value include, but
are not limited to, examining the current market price for the shares if the
licensee is publicly traded, examining recent rounds of financing and the
licensee's business plan if not publicly traded, and performing other due
diligence procedures. The new program will not affect the ongoing royalties
payable under QUALCOMM's CDMA license agreements.
In December 2000, the Company announced the formation of a Korean partnership
fund, QUALCOMM/Hansol iV CDMA Fund, with Hansol i Ventures Co., Ltd. to invest
in Korean start-up companies engaged in the development and commercialization of
CDMA products to support the adoption of CDMA and the use of the wireless
Internet. See "Notes to Condensed Consolidated Financial StatementsNote
5Investments in Other Entities."
In December 2000, the Company and an investor in CDMA telecommunications
operators in Latin America executed a Term Loan Agreement in which the Company
agreed to provide $230 million of convertible debt financing, including $30
million for capitalized interest. See "Notes to Condensed Consolidated Financial
StatementsNote 8Commitments and Contingencies."
On January 22, 2001, the Company entered into a senior secured credit facility
with Leap Wireless International, Inc. (Leap Wireless) in the amount of $125
million. Under the agreement, the Company expects to transfer a $125 million
Auction Discount Voucher to Leap Wireless to support its spectrum acquisition
activities in the FCC's current auction of PCS spectrum. The facility is
expected to be repaid in a lump sum payment, including principal and accrued
interest, no later than five years after the date of the initial draw. The
facility bears interest at a variable rate, to be determined based on the
collateral provided to the Company.
The Company was required to adopt Statement of Financial Accounting Standards
No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities" as of the beginning of fiscal 2001. FAS 133 requires certain
derivative instruments to be recorded at fair value. After adoption of FAS 133,
unrealized gains and losses on these derivative instruments are recorded in the
income statement. The Company recorded a $129 million gain, net of taxes, as the
cumulative effect of the change in accounting principle as of the beginning of
fiscal 2001. The cumulative effect of the accounting change related primarily to
the recognition of the unrealized gain on a warrant to purchase 4,500,000 shares
of Leap Wireless common stock issued to the Company in connection with its
spin-off of Leap Wireless in September 1998. Additionally, the Company recorded
$160 million in pre-tax unrealized losses on derivative instruments during the
first quarter of fiscal 2001, primarily resulting from a decline in the market
price of Leap Wireless stock which reduced the fair value of the Leap Wireless
warrant. The new requirement to record unrealized gains and losses on these
instruments in the income statement may cause substantial quarterly and annual
fluctuations in operating results due to stock market volatility. See "Notes to
Condensed Consolidated Financial StatementsNote 1Basis of Presentation" and
"Item 3. Quantitative and Qualitative Disclosure About Market Risk."
FIRST QUARTER OF FISCAL 2001 COMPARED TO FIRST QUARTER OF FISCAL 2000
Total revenues for the first quarter of fiscal 2001 were $684 million compared
to $1,120 million for the first quarter of fiscal 2000. Total revenues for the
first quarter of fiscal 2000 included $356 million in revenue related to the
terrestrial-based CDMA wireless consumer phone business which was sold in
February 2000. Excluding the revenue of the business sold from the first quarter
of fiscal 2000, total revenues decreased by $80 million in the first quarter of
fiscal 2001. The decrease is primarily attributable to the decision to not
recognize revenue on business with Globalstar before cash is received, lower
shipments of Globalstar portable and fixed phones to service providers, a
decrease in OmniTRACS domestic unit shipments, and decreases in average selling
prices of integrated circuits, offset by increased royalties and license fees
and higher OmniTRACS messaging revenue. Revenue from two customers of the QCT
and QTL segments, Kyocera Wireless Corp. (Kyocera) and Samsung Electronics
Company (Samsung), comprised an aggregate of 16% and 14% of total revenues in
the first quarter of 2001, respectively, compared to an aggregate of 11% of
total revenues from Samsung in the first quarter of fiscal 2000.
Cost of revenues for the first quarter of fiscal 2001 was $296 million compared
to $649 million for the first quarter of fiscal 2000. Total cost of revenues for
the first quarter of fiscal 2000 included
$318 million in cost of revenues related to the terrestrial-based CDMA wireless
consumer phone business which was sold in February 2000. Excluding the cost of
revenues of the business sold from the first quarter of fiscal 2000, total cost
of revenues decreased by $35 million in the first quarter of fiscal 2001, and
cost of revenues as a percentage of revenues was 43% for the first quarter of
fiscal 2001 and 43% for the first quarter of fiscal 2000. Although the
percentage of revenues remained consistent, the decision to not recognize
revenue on business with Globalstar before cash is received negatively affected
margin, but the effect was offset by a higher percentage of revenues from
royalties and license fees and OmniTRACS messaging services. Cost of revenues as
a percentage of revenues may fluctuate in future quarters depending on the mix
of products sold and services provided, royalties and license fees earned,
competitive pricing, new product introduction costs and other factors.
For the first quarter of fiscal 2001, research and development expenses were $86
million or 13% of revenues, compared to $83 million or 7% of revenues for the
first quarter of fiscal 2000. The dollar and percentage increases in research
and development expenses were primarily due to increased integrated circuit
product initiatives to support high-speed wireless Internet applications and
mobile data applications, including new cdma2000 1xEV products and position
location technologies, offset by a decrease in terrestrial-based CDMA wireless
consumer phone research and development as a result of exiting this business in
February 2000.
For the first quarter of fiscal 2001, selling, general and administrative
expenses were $80 million or 12% of revenues, compared to $102 million or 9% of
revenues for the first quarter of fiscal 2000. The dollar decrease in selling,
general and administrative expenses from the first quarter of fiscal 2000 was
due to a decrease in marketing costs for terrestrial-based CDMA wireless
consumer phone products as a result of the sale of the business in February
2000. The percentage increase is primarily due to expanded international
business in China and other regions and higher advertising and trade show
expenses related to the expansion of the integrated circuit customer base and
product portfolio.
Amortization of goodwill and other acquisition-related intangible assets was $63
million for the first quarter of fiscal 2001 primarily related to the
acquisition of SnapTrack in March 2000. See "Notes to Condensed Consolidated
Financial StatementsNote 2Acquisitions."
For the first quarter of fiscal 2001, asset impairment and related charges were
$481 million, compared to $26 million for the first quarter of fiscal 2000.
Asset impairment and related charges during the first quarter of fiscal 2001
were comprised primarily of charges related to certain assets that management
has determined are impaired and other charges related to the Globalstar
business. Asset impairment and related charges during the first quarter of
fiscal 2000 were comprised primarily of charges to reflect the estimated
difference between the carrying value of the net assets and the consideration
received from Kyocera related to the sale of the terrestrial-based CDMA wireless
consumer phone business, less costs to sell.
For the first quarter of fiscal 2001, other operating expenses were $69 million
related to an arbitration decision against the Company.
Interest expense was $9 million for the first quarter of fiscal 2001, compared
to $3 million for the first quarter fiscal 2000. The increase was due to $8
million in interest charges resulting from an arbitration decision against the
Company, offset by lower interest expense resulting from decreased bank
borrowings.
Net investment expense was $232 million for the first quarter of fiscal 2001
compared to net investment income of $36 million for the first quarter of fiscal
2000. The decrease was primarily due to $160 million in unrealized losses on
derivative instruments in accordance with FAS 133, $144 million in unrealized
losses related to other than temporary impairment of marketable securities, and
a $10 million charge related to the recognition of an other than temporary loss
on the Company's investment in Globalstar Telecommunications, Ltd., offset by a
$27 million increase in interest income,
primarily related to interest earned on finance receivables and higher cash
balances and interest rates, and an $18 million increase in realized gains on
the sale of marketable securities.
For the first quarter of fiscal 2001, there were no distributions on Trust
Convertible Preferred Securities due to the conversion of all remaining Trust
Convertible Preferred Securities into common stock during the second quarter of
fiscal 2000. This is compared to $11 million in distributions for the first
quarter of fiscal 2000. See "Liquidity and Capital Resources."
For the first quarter of fiscal 2001, the Company recorded $57 million in other
nonoperating charges to write down the recorded values of a note receivable from
and warrants to acquire partnership interests in Globalstar to their estimated
fair values.
The income tax benefit was $330 million for the first quarter of fiscal 2001
compared to an income tax expense of $105 million for the first quarter of
fiscal 2000. The annual effective tax rate is expected to be 48% for fiscal
2001, compared to 44% for fiscal 2000. The higher tax rate is primarily a result
of lower pre-tax earnings relative to nondeductible charges. The Company has
provided a valuation allowance on its net deferred tax assets because of
uncertainty regarding their realizability due to the expectation that deductions
from future employee stock option exercises and related deductions will exceed
future taxable income. The Company's valuation allowance against net deferred
tax assets has been increased by $420 million in the first quarter of fiscal
2001 and was reflected as a reduction of stockholders' equity.
The Company recorded a $129 million gain, net of taxes, in the first quarter of
fiscal 2001 as the cumulative effect of a change in accounting principle at
September 25, 2000. The cumulative effect of the accounting change related
primarily to the unrealized gain on a warrant to purchase 4,500,000 shares of
Leap Wireless International, Inc. (Leap Wireless) common stock issued to the
Company in connection with its spin-off of Leap Wireless in September 1998. See
"Notes to Condensed Consolidated Financial StatementsNote 1Basis of
Presentation."
QUALCOMM SEGMENT RESULTS FOR THE FIRST QUARTER OF FISCAL 2001 COMPARED TO FIRST
QUARTER OF FISCAL 2000
The following should be read in conjunction with the first quarter financial
results of fiscal 2001 for each reporting segment. See "Notes to Condensed
Consolidated Financial StatementsNote 9Segment Information."
CDMA TECHNOLOGIES SEGMENT (QCT)
QCT segment revenues for the first quarter of fiscal 2001 were $330 million
compared to $352 million for the first quarter of fiscal 2000. Earnings before
taxes for the first quarter of fiscal 2001 were $84 million compared to $128
million for the first quarter of fiscal 2000. Revenues decreased primarily due
to a decrease in average selling prices of integrated circuits. The decrease in
earnings before taxes was due to increased research and development primarily
associated with new integrated circuit product and technology initiatives to
support high-speed wireless Internet access and mobile data applications,
including cdma2000 1xEV (HDR), position location, Bluetooth and multimedia
capabilities, and marketing and advertising expenses. Approximately 15 million
MSM integrated circuits were sold during the first quarter of fiscal 2001,
compared to approximately 15 million for the first quarter of fiscal 2000. The
Company anticipates shipments in the second quarter of fiscal 2001 to be
constrained by a capacity limitation at one of its suppliers. The Company
expects the supply constraint to be substantially resolved by the third quarter
of fiscal 2001.
TECHNOLOGY LICENSING SEGMENT (QTL)
QTL segment revenues for the first quarter of fiscal 2001 were $223 million
compared to $178 million for the first quarter of fiscal 2000. Earnings before
taxes for the first quarter of fiscal 2001 were $142 million compared to $163
million for the first quarter of fiscal 2000. Growth in revenues was primarily
due to increased royalty revenues resulting from an increase in worldwide demand
for products based on CDMA technologies, and significant license fees related to
the expansion of existing licenses to include third generation systems, such as
WCDMA, cdma2000 and TD-SCDMA, and new license agreements. The decrease in
earnings before taxes was due to a $69 million charge resulting from an
arbitration decision against the Company. Excluding the arbitration judgment,
earnings before taxes for the first quarter of fiscal 2001 would have been $211
million compared to $163 million for the first quarter of fiscal 2000.
WIRELESS SYSTEMS SEGMENT (QWS)
QWS segment revenues for the first quarter of fiscal 2001 were $93 million
compared to $215 million for the first quarter of fiscal 2000. QWS recorded a
loss before taxes for the first quarter of fiscal 2001 of $588 million compared
to earnings before taxes of $66 million for the first quarter of fiscal 2000.
Revenues and earnings decreased primarily due to asset impairment and other
charges related to the Globalstar business totaling $595 million, the decision
to not recognize revenue on business with Globalstar before cash is received,
lower shipments of Globalstar portable and fixed phones to service providers, a
decrease in OmniTRACS domestic unit demand, offset by an increase in OmniTRACS
messaging services revenue. The Company shipped approximately 10,000 OmniTRACS
and other related communication systems during the first quarter of fiscal 2001,
compared to approximately 14, 000 in the first quarter of fiscal 2000. The
decrease in unit shipments is due to higher fuel prices and domestic economic
conditions affecting the long-haul trucking industry. The Company shipped
approximately 2,000 Globalstar portable and fixed phones in the first quarter of
fiscal 2001 compared to 29,000 in the first quarter of fiscal 2000, for a
cumulative total of approximately 101,000 Globalstar portable and fixed phone
units shipped since production began in September 1999. The decrease in unit
shipments is due to the slow ramp-up of subscriber growth realized by the
Globalstar service providers.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that its cash and cash equivalents and marketable
securities balances of $2,410 million at December 31, 2000, including interest
to be earned thereon, will be used to fund its working and other capital
requirements, including investments in other companies and other assets to
support the growth of its business, financing for customers of CDMA
infrastructure products in accordance with the agreement with Ericsson,
financing under agreements with CDMA telecommunications operators, and other
commitments. In the event additional needs for cash arise, the Company may raise
additional funds from a combination of sources including potential debt and
equity issuance. On July 25, 2000, QUALCOMM Spinco filed a Registration
Statement on Form S-1 related to its proposed IPO. Given current uncertainties
in the financial markets, the Company is evaluating the need for and timing of
an IPO. If an IPO occurs, QUALCOMM Spinco would add the net proceeds of the
offering to funds available for working capital and general corporate purposes,
including product development and selling and marketing.
The Company had an unsecured credit facility under which banks were committed to
make up to $400 million in revolving loans to the Company, maturing in March
2001. At December 31, 2000, there were no amounts or letters of credit issued or
outstanding under the facility. Effective January 26, 2001, QUALCOMM terminated
this facility.
In the first quarter of fiscal 2001, $254 million in cash was provided by
operating activities, compared to $81 million in cash provided by operating
activities in the first quarter of fiscal 2000. Cash provided by operating
activities in the first quarter of fiscal 2001 and fiscal 2000 includes $348
million and $350 million, respectively, of net cash flow provided by operations
offset by $94 million and $269 million, respectively, of net working capital
requirements. Net working capital requirements for the first quarter of fiscal
2001 primarily reflect an increase in finance receivables and inventories and a
reduction in payroll, benefits and other current liabilities, offset by a
decrease in accounts receivable. |
