Qualcomm Incorporated (NASDAQ: QCOM) today announced financial results for the fourth quarter and fiscal year ended September 29, 1996. Revenues for the fourth quarter were $283 million, up 133 percent from the year ago quarter of $122 million, while revenues for the year were $814 million, up 111 percent from the prior year's revenues of $387 million.
Net income for the fourth quarter was $8 million compared with the year ago quarter of $11 million, while net income for the 1996 fiscal year was $21 million compared with the fiscal 1995 net income of $30 million.
Fully diluted earnings per share for the fourth quarter were $.11 compared to $.17 from the year ago quarter, while fully diluted earnings per share for the fiscal year were $0.30 compared to $0.52 per share in the previous year. Earnings were lower due to significant investment in research and development and selling and marketing expenses in 1996, both of which doubled in absolute dollars in the fiscal year, but fell as a percentage of sales, and to lower percentage gross margins incurred in commencing high volume manufacturing of Code Division Multiple Access (CDMA) subscriber and infrastructure equipment.
To meet the rising demand for CDMA, OmniTRACS® and Eudora® products, many customers placed orders with Qualcomm this year and total backlog and contracts as of September 29, 1996 totaled over $1.7 billion. Portions of the backlog and certain contracts are subject to performance guarantees and contingencies. "This fiscalyear has been one of record growth for Qualcomm, especially for our CDMA business," said Irwin Mark Jacobs, chief executive officer. "Significant major milestones were achieved in the development and deployment of CDMA technology. Orders were received by the Company for approximately $1 billion in equipment, commercial CDMA products were shipped in large volumes to network operators, and the several major Personal Communications Services (PCS) and cellular networks commenced digital service domestically and internationally, including PCS PrimeCo, Hutchison Telephone, Korea Mobile Telecom, Shinsegi, 360° Communications, AirTouch Cellular and Bell Atlantic Nynex Mobile (BANM). Our OmniTRACS system business continued to make strong contributions, with particular growth in international unit sales and in messaging revenues domestically, as we grew our share of the U.S. long-haul trucking mobile wireless communications market."
Business Highlights for the Quarter and Fiscal Year
In North America, many of the leading PCS and cellular operators have chosen CDMA, and are now building commercial networks in virtually every major market. PCS PrimeCo recently announced the nationwide commercial launch of their digital CDMA networks in 15 of their markets using QCP-1900 phones manufactured by Qualcomm Personal Electronics (QPE), a joint venture between Qualcomm and Sony. This marks a major milestone in the continuing deployment of CDMA technology. Earlier this fiscal year a number of service operators, including Korea Mobile Telecom, Shinsegi Telecom, AirTouch Cellular, Bell Atlantic Nynex Mobile (BANM) and 360° Communications joined Hutchison Telephone in Hong Kong by launching commercial CDMA service, and by September industry sources placed the CDMA subscribers at over 400,000. The Company is shipping CDMA phones and infrastructure to support most of these commercial deployments. In conjunction with Northern Telecom, Qualcomm began the delivery of commercial infrastructure equipment to Sprint Spectrum L.P. (SSLP) for the build-out of their PCS systems in late 1996 and continued delivering to BC TEL Mobility for the CDMA overlay to their cellular system.
The strategic CDMA alliance with Hughes Network Systems (HNS), a subsidiary of General Motors, is another significant milestone, expanding the market for Qualcomm designed and manufactured infrastructure equipment. Under its agreement, Qualcomm will share its infrastructure designs with HNS. In return, HNS has agreed to purchase from Qualcomm an ongoing percentage of HNS's customers'infrastructure requirements. HNS recently announced a strategic supply agreement with NextWave Communications under which HNS willsupply up to $1 billion in CDMA infrastructure equipment over the next six years for NextWave's CDMA PCS network.
In fiscal 1996, QPE dedicated a new manufacturing facility and completed the installation of eight production lines in order to support existing and future orders for CDMA phones. To alleviate future shipment limitations related to the supply of components, QPE has secured alternative sources for most ASIC components required in the production of CDMA handsets and infrastructure. During the fourth quarter, QPE's CDMA handset production capacity continued to ramp up and shipments exceeded 200,000 phones, and to date, QPE has produced over 400,000 CDMA phones for U.S. and international service providers. Qualcomm also broke ground on a new manufacturing facility scheduled for completion early in the first quarter of 1997, which will increase infrastructure production capacity to over 400 base stations per month. In support of the licensees manufacturing CDMA equipment, the Qualcomm ASIC components business shipped over two million ASICs during the fiscal year.
Combined domestic and international OmniTRACS unit shipments were 10,969 in the fourth quarter. This brought the total number of shipped OmniTRACS system units to over 175,000. The total number of countries now delivering OmniTRACS service is 32, served by 8 network management facilities. "With over 650 domestic customers, Qualcomm's OmniTRACS business continues to be successful in both the capture of new orders, such as National Freight Inc., Global Van Lines, Superior Carriers, and May Trucking Company, and the renewal of existing contracts with major transportation companies, including J.B. Hunt, Chemical Leaman Tank Lines, and Comcar Industries, Inc.," said Harvey P. White, president.
The Company received approval from the FCC to increase its authority to support over 250,000 OmniTRACS system terminals. In recognition of the OmniTRACS system's superior performance and functionality, OmniTRACS equipment was used to track the Olympic Torch on its 15,000 mile trek across the U.S. and is in use by the U.S. Army for peace keeping efforts in Bosnia.
During the quarter, the Globalstar development effort passed a significant milestone with the successful completion of end-to-end calls using laboratory Globalstar hardware. With the signing of 21 more service provider agreements, Globalstar extended its reach to 103 countries around the world. Earlier in the year, Qualcomm licensed Orbitel Mobile Communications Ltd. as a manufacturer of Globalstar handsets.
With over 18 million users, Eudora email software continues to lead the Internet email market with over 70 percent of all new Internet mailboxes, according to a recent study by International Data Corporation. During the quarter, the Eudora Division released a new version of Eudora Pro for Windows operating system. The planned introduction of a client/server configuration will extend the software's reach from the Internet to corporate "intranets," opening the door to a large, rapidly growing market. Integration of Eudora capability with the Company's wireless products is a strategic objective.
Identifying Qualcomm as a company with a consistently applied system of quality standards and procedures for design, development, production, installation and servicing, Qualcomm received a Certificate of Registration during the year for conformance to the ISO 9000 and 9001 international standards, recognized worldwide as a hallmark of total quality management.
Highlights of Financial Performance
Communications systems revenues were $215 million in the fourth quarter, a 174 percent increase over revenues of $79 million in the same quarter in fiscal 1995. For the fiscal year, communication systems revenues were $583 million, a 136 percent increase over fiscal 1995 revenues of $247 million. This growth was due to the increase of sales of CDMA subscriber equipment to carriers and Application Specific Integrated Circuits (ASIC) products to other CDMA manufacturers. Communications systems gross margin was 22 percent in the fourth quarter versus 34 percent in the fourth quarter of 1995, and for the fiscal year, the gross margin was 24 percent compared to 42 percent in the 1995 fiscal year, due to lower gross margins on CDMA and ASIC products compared with the OmniTRACS business that contributed the majority of communications systems revenue in the year ago quarter. The gross margin on CDMA products was impacted by start-up costs associated with a ramp-up of high volume manufacturing.
Contract Services revenues in the fourth quarter reached $36 million, a 47 percent increase over revenues of $24 million in last year's fourth quarter, and for the fiscal year Contract Services revenues were $131 million, a 38 percent increase over fiscal 1995 revenues of $95 million, due primarily to the increased resources applied to the Globalstar development contract.
License, royalty and development fees contributed $32 million in the quarter, a 72 percent increase compared to revenues of $19 million in the same quarter of the prior year, and license and development fees contributed $100 million in the fiscal year, a 125 percent increase compared to $44 million from the 1995 fiscal year. During the fourth quarter, Qualcomm signed multi-million dollar license contracts with Hughes Network Systems (HNS), Sony Electronics, Inc., and Kyocera Corporation, and included revenues from software licenses and other fees from new and existing licensees.
During the year, a total of three new CDMA infrastructure licensees, five new subscriber licensees, two new ASIC licensees and two new test equipment licensees were added to the list of companies who are authorized to build and sell equipment based on Qualcomm's CDMA technology, bringing the total count of licenses to 48. In addition to those stated previously, subscriber, infrastructure and ASIC licenses were granted to DENSO Co. Ltd., Kenwood Corporation, Siemens Wireless Terminals, VLSI Technology and DSP Communications. Also, royalties, principally from the sale of handset and infrastructure equipment by licensees, increased with delivery of commercial CDMA networks around the world. The Company expects to continue to experience quarterly fluctuations in license and development fee revenues.
Research and development (R&D), sales and marketing (S&M)and general and administrative (G&A) expenses, both in the quarter and in the fiscal year, grew substantially in absolute dollars, while decreasing from the year ago quarter and the previous fiscal year as a percent of sales. Qualcomm continues to invest in the development of CDMA infrastructure, subscriber equipment and ASIC products for commercial deployment and in new OmniTRACS system and other products, positioning the Company to increase its participation in the rapidly growing wireless market. In the fourth quarter, R&D expenses doubled from the year ago quarter from $24 million to $48 million, but decreased as a percent of sales from 20 percent to 17 percent, and similarly in the fiscal year, R&D expenses doubled from the 1995 fiscal year from $80 million to $162 million, but decreased as a percent of sales from 21 percent to 20 percent.
The increase in Sales and Marketing expenses reflected growing sales activities focused on introducing Qualcomm's commercial CDMA wireless products to worldwide markets. Qualcomm also participated with its customers in cooperative sales and marketing programs, including market development funding. In the fourth quarter, S&M expenses more than doubled from the year ago quarter from $11 million to $23 million, but decreased as a percent of sales from 9 percent to 8 percent, and similarly, in the fiscal year, S&M expenses nearly doubled from the 1995 fiscal year from $38 million to $74 million, but decreased as a percent of sales from 10 percent to 9 percent.
In the quarter, G&A expenses increased over the year ago quarter from $9 million to $15 million, but fell as a percent of sales from 7 percent to 5 percent, and in the fiscal year G&A expenses increased over the previous fiscal year from $35 million to $49 million, but fell as a percent of sales from 9 percent to 6 percent.
Net interest income decreased slightly to $3.6 million for the quarter, compared to $4.0 million for the year ago quarter. Net interest income increased to $21 million in fiscal 1996 compared with $7 million in fiscal 1995. The increase resulted from interest income on proceeds raised in an equity offering in August 1995.
Headquartered in San Diego, Qualcomm develops, manufactures, markets, licenses and operates advanced communications systems and products based on its proprietary digital wireless technologies. The Company's primary product areas are the OmniTRACS® system (a geostationary satellite-based, mobile communications system providing two-way data and position reporting services), CDMA wireless communications systems and products and, in conjunction with others, the development of the Globalstar low-earth-orbit (LEO)satellite communications system. Other Company products include the Eudora Pro electronic mail software, ASIC products, and communications equipment and systems for government and commercial customers worldwide. For more information on Qualcomm products and technologies, please visit the Company's web site at http://www.qualcomm.com.
Except for the historical information contained herein, this news release contains forward-looking statements that are subject to risks and uncertainties, including timely product development and commercial implementation of the Company's CDMA technology, continued growth in the CDMA subscriber population and the scale up and operations of CDMA systems, timing and receipt of license fees and royalties, the Company's ability to successfully manufacture significant quantities of CDMA or other equipment on a timely and profitable basis and those related to performance guarantees, change in economic conditions of the various markets the Company serves, as well as the other risks detailed from time to time in the Company's SEC reports, including the report on Form 10-K for the year ended September 28, 1997 and most recent Form 10-Qs.