Great read on the last financial, and the events that lead up to the report.
FOOL PLATE SPECIAL
Qualcomm Responds
Bill Mann had a few questions for Qualcomm after the company's latest earnings report. The senior vice president for investor relations at the wireless communications powerhouse recently followed up with some in-depth responses. One of the real lessons from this episode is that reading earnings releases is not a substitute for poring over SEC filings.
By Bill Mann (TMF Otter)
November 16, 2001
In my recent story following wireless communications technology company Qualcomm's (Nasdaq: QCOM) fourth-quarter earnings report, I mentioned that I had submitted a few questions about the company's earnings presentation to Julie Cunningham, Qualcomm's senior vice president for investor relations. Cunningham was kind enough to respond to my questions, and I'm going to post her answers here in full.
I continue to be extremely impressed with the thoroughness of the information Qualcomm provides its shareholders. I'd like to call extra attention to Cunningham's answer to my third question, which deals with the risks involved with strategic investments and vendor finance. In her comments, Cunningham notes that Qualcomm goes to great lengths to disclose these risks in its quarterly 10-Q and annual 10-K filings.
She's right, and that -- rather than earnings press releases -- is the proper place for such disclosures. This illuminates the need not only to read press releases, but also to thoroughly dissect a company's SEC filings, which generally become available two to three weeks after a quarterly earnings release on the SEC's website, ours, and elsewhere.
Even in the case of companies that tend to lay all their laundry out, some things are not discussed in earnings releases that are addressed in 10-Qs and 10-Ks, and these things are often quite important.
For more background on the Qualcomm-specific issues discussed in this story, please re-read the original article. The statements below have been edited for style but not content.
TMF: The third-quarter results included a projection for the fourth quarter for [net income of] $0.25 per share, pro forma. It did not mention whether or not these were inclusive of the accounting change required under SAB 101. Seeing as the SAB was issued in 1999, the required change could not have been a surprise. Why was the adjustment schedule not mentioned in the third-quarter projections?
Cunningham: When we provided Qualcomm's fiscal fourth quarter pro forma earnings guidance of $0.25 per share, our best information and understanding at the time was that SAB 101 would not have a material effect on earnings. Specifically, we expected that in the fiscal fourth quarter Qualcomm would record significant fees that were primarily related to the license agreements signed with Nokia (NYSE: NOK) in July 2001.
After we provided fourth-quarter guidance, new interpretations of SAB 101 were published and Qualcomm management and its outside accountants had to examine these new interpretations as they might be applied to each of our businesses. The guidance available in the accounting literature was not precisely laid out in regard to our individual facts and circumstances, particularly as they related to license fees. Therefore, we required further time to examine the issues and determine the most appropriate accounting treatment.
It was only very recently that we reached a final understanding of SAB 101 accounting as it relates to our specific businesses. This change resulted in the amortization of license fees over a long period of time (up to seven years) instead of recognizing the fees in the quarter in which the agreements are signed. Please note that we expect SAB 101 to have minimal net effects on fiscal year 2002, in line with our earlier guidance. I would also add that we view the SAB 101 change positively because it is expected to smooth licensing revenues over time and make our [Qualcomm Technology Licensing] segment results more predictable.
TMF: One of the items that impacted earnings was that Qualcomm received no interest on its vendor-finance arrangement with troubled Mexican carrier Pegaso. The reason given was that Qualcomm ceased accruing interest because a restructure deal for Pegaso did not close by Oct. 31. Oct. 31 was the end of the quarter, so accruals through the quarter should not have been affected by this event, or lack thereof. What is troubling about this is the lack of mention of this risk in the third-quarter projections, when the interest was already (as reported) not accruing. Why was the Oct. 31 date for the deal completion listed as the trigger?
Cunningham: As of our last earnings report and guidance in late July, Pegaso had been in negotiations to be acquired by a third party and had received from Qualcomm adequate extensions (from Sept. 19 to Oct. 31) of credit to continue operating its business without interruption. The Oct. 31 milestone was expected to be met because of the advanced stage of negotiations among the Pegaso equity holders and the third party. We expected the transaction to be completed by Oct. 31 and the interest income accrual to be recognized during the September quarter.
When the Oct. 31 milestone was not met, which was only a few days before our earnings announcement, it became clear that the parties required more time to complete negotiations. This created uncertainty about the timing and status of the transaction, and the additional passage of time caused Pegaso's operating cash balances to decrease. The uncertainty over additional financing for Pegaso brought into question its ability to pay accrued interest in the September quarter. As a result, we elected not to recognize the interest income even though the interest accrual continues on the loans to Pegaso.
TMF: This was the second-consecutive quarter in which Qualcomm's earnings have been adversely impacted by a carrier's inability to fulfill its obligations under a vendor finance deal. (Qualcomm disclosed in Q3 that it was taking an impairment charge for its investment in Brazilian carrier Vesper). Some further discussion of other vendor financing and strategic investment risks undertaken by Qualcomm would have seemed appropriate in the business outlook discussion so that these issues do not keep surprising shareholders.
Cunningham: Qualcomm's public 10-Q and 10-K filings and quarterly earnings releases continually remind investors of the risks inherent in the company's strategic investments in CDMA operators and vendor financing. Despite the difficult global economic conditions, we strongly believe the benefits continue to outweigh the risks due to the strategic importance of fostering CDMA growth in underserved parts of the world and creating potential long-term financial returns to Qualcomm from chipset sales and royalties.
Bill Mann's waiting for a rap star to call himself "CDMA," though he's pretty sure it would stand for something else. The Motley Fool is investors writing for investors. |
