Meeting notes - Part 3 - Bill Keitel
Bill Keitel – CFO
Slide 2 – Commitment to Accounting Integrity and Reporting Clarity
Keitel said that Qualcomm was the 6th company out of several hundred to file the newly required certification with the SEC in July. For the last three quarters, Qualcomm has simultaneously filed its Form 10-Q with the SEC at the same time as it issues its earnings release. Prior to this recent change, there had usually been one or two days that intervened. There are very few companies that do this simultaneously or even within a few days. Qualcomm goes beyond the SEC requirements and makes full disclosure of its outstanding commitments, which are published on its website. [http://www.qualcomm.com/IR/annualreport/segment/qsi_invest_0103.html]
The four segments are how we look at the company internally. We think the segments are important for investors to understand the company and importantly to value the company… Reconciling items consist primarily of the interest income on our substantial cash portfolio. Most investors tend to look at our core business when they try to establish a value on the basis of our earnings and our cash flow – they value looking at our earnings and a multiple of our earnings or they look at our cash flow and discount those cash flows back to the present point in time for the value of the company. In the case of our strategic investments which are made for the purpose of accelerating the growth of CDMA or expanding the market of CDMA, they have a long term earnings potential for the company. The valuation basis is very different. It’s not a multiple; it’s not a discount basis. Rather it is an estimate of what those assets are worth and that would be the value.
Slide 5 – Qualcomm Excluding QSI – FY2002
BK: .. Investors see a lot of complexity about our company – [the technology; accounting]. But when we look at our company internally, there’s a simplicity to it. Within our core business, the QCT and QTL make up the lion’s share of our revenues, earnings and cash flow. In the case of FY2002, QCT and QTL combined made up 84% of our revenue and 98% of our earnings before tax. Now, what is key about those two businesses is that more than 90% of that combined revenue results directly from the sale of new CDMA handsets… If a new CDMA phone is sold anywhere in the world, Qualcomm earns a royalty. In the majority of CDMA phones that are sold across the world, there’s one or more chips from our semiconductor unit in the phone. CDMA market growth is the foremost key to increasing our shareholder value.
Slide 6 – Qualcomm Strategic Initiatives – FY2002 Income Statement
BK: … The bulk of QSI revenues is from cases where Qualcomm either has a controlling interest in that investment or a substantial interest in the investment. We’re required in our P&L to include our share of the revenue and our share of the losses… The keys for our shareholders are (i) what is the total cash that we put in and what ultimately will be the cash that we receive out of QSI and (ii) what is the effect on the overall growth rate of the CDMA market from these selective investments that we make.
Now if you progress through time, what we’re seeing is a reduction in the rate of investment of new cash into QSI – in 2001, approximately $800 million; in 2002, approximately $600 million; and the estimate that we gave to our investors a few weeks ago was that this year we expect to invest approximately $350 million. The primary reason for this decline is that as we get nearer and nearer to more and more operators around the world implementing CDMA, we’re seeing less opportunity for Qualcomm’s investment to have that influence that we’ve seen in the past – the opportunity to accelerate the growth of the CDMA market.
Slides 7–10
[Skipped slides and most of Keitel remarks on great revenues and profits growth, year over year, quarter over quarter etc.]
Many companies that realize a revenue growth of 54% [as Qualcomm did recently] then show a use of cash rather than a generation of cash. If you’re growing your revenues, typically your inventories and receivables are having to grow and your capital expenditures are having to grow. Qualcomm’s business model is quite unique: Our margins are higher than many companies and the capital intensity of our business is quite low. Despite a 54% increase in revenue year over year, we were able to grow our cash position again at 54% for a total of $3.7 billion.
Slide 12
This interesting slide was designed to show key cash and dividend information. The bar chart is based upon Morgan Stanley analysis of the most recent filings by the companies and shows the ratio of cash and equivalents to the sum of the OpEx and CapEx for the last quarter. Qualcomm had the second best ratio among the companies listed:
Microsoft 16.3
Qualcomm 10.1
Nokia 5.1
Dell 4.7
Cisco 4.5
Intel 3.4
TI 3.0
IBM 1.0
… One of the most important considerations to this dividend and stock repurchase program was our own internal thoughts on whether we would retain the financial flexibility for the bigger goal that Tony Thornley spoke to – 13% share today of wireless subscribers – we want to grow that to 100%. And the conclusion was that we clearly have the financial strength, cash position and the expected cash flow to have the financial flexibility to react to the opportunities and needs as we grow this company over the next several years. |
