Qualcomm Incorporated (NASDAQ: QCOM) today reported revenues of $520 million for the third quarter of fiscal year 1997, more than double the revenues of $235 million reported in the third fiscal quarter of 1996. For the nine months ended June 29, 1997, revenues increased to nearly $1.5 billion, compared to $531 million for the same period in fiscal 1996.
Third quarter 1997 earnings per share of $.49 and the earnings for the nine months ended June 29, 1997 of $.85 per share reflect a significant increase over the earnings reported for the same periods in fiscal 1996, $.02 per share and $.19 per share, respectively. Third quarter 1997 earnings were favorably impacted by the sale of trading securities and the recognition of the entire deferred tax asset. Together these items contributed approximately $.14 to earnings per share.
"Qualcomm's strong performance reflects the growing acceptance of our CDMA technology and products worldwide," said Dr. Irwin M. Jacobs, chairman and CEO of Qualcomm Incorporated. "We have quickly become a leading CDMA handset supplier and are now introducing two families of third generation phones in time for the 1997 holiday selling season. We are completing delivery of infrastructure products which support Sprint's now nationwide commercial CDMA network, and we are moving from development to production of our Globalstar products. We are the leading supplier of CDMA ASICs and other technical services to both our infrastructure and subscriber equipment licensees. To sustain long-term growth and profitability, we will continue to invest heavily in innovative new products and technology enhancements to further build CDMA market share and support Qualcomm's leadership position."
Compared to the prior fiscal year, third quarter 1997 earnings from operations benefited from several factors, including strong Application Specific Integrated Circuits (ASICs) sales; higher license, development and royalty revenues; increased sales of CDMA handsets; and companywide efforts to reduce costs and improve margins.
Third quarter revenue declined by $66 million from second quarter revenue of $586 million. This decline was primarily driven by two factors. First, handset revenue decreased due to off-peak summer demand and the transition to new phone models. Secondly, cumulative infrastructure revenues were recognized for the Sprint PCS contract during the second quarter of 1997. Communications systems gross margins improved to 25 percent in the current quarter, compared to 18 percent for the second quarter of this year. This increase was driven by higher ASICs sales and improved handset margins.
"We expect the transition to our new phone models and the associated operating and development expenses to continue into the fourth fiscal quarter," said Harvey P. White, president of Qualcomm Incorporated. "We anticipate that the results of our activities and investments in these areas should come to fruition in the first half of fiscal year 1998. In addition, we are hopeful that international market developments will play an important role in future results of our infrastructure business; however, these markets remain subject to volatile political, economic and market conditions."
The increase in license, royalty and development fees during the quarter included significant growth in the deployment of CDMA systems by licensees. New licensees announced during the quarter include Sharp Corporation, Haitai Electronics, Kokusai Electric Co. and Ortel Corporation.
While operating expenses as a percentage of revenues continued to be lower than in fiscal year 1996, these expenses increased in terms of absolute dollars. The primary contributors to the growth in operating expenses during the third quarter were the development of new phone models, the launch of the Company's brand awareness and nationwide advertising campaign, and the increase in legal fees associated with patent infringement litigation.
Business Highlights for the Quarter
Qualcomm continued its leadership position in CDMA ASICs, announcing the cumulative shipment of over six million Mobile Station Modem (MSM) chips to CDMA phone manufacturers worldwide. The volume ASICs production, which ramped up in record time beginning in the second half of 1996, currently supports the sales of one million CDMA chipsets per month.
International CDMA equipment contracts signed during the quarter include a $300 million agreement with an affiliate of Telecom Great Wall Development Company of Beijing for the purchase of Qualcomm-branded QCP-820™ CDMA digital phones. This represents the largest CDMA contract signed for the People's Republic of China, positioning Qualcomm as the leading supplier of CDMA phones to China.
Qualcomm was selected by Bell Mobility of Canada for a $70 million contract for the supply of CDMA digital phones. Bell Mobility ordered the Q™ phone, the new palm-sized CDMA digital PCS phone and the QCP-2700™, the first CDMA digital dual-band, dual-mode phone to provide access to both Bell Mobility's new PCS network and its existing analog network. Other significant Q phone orders are currently under negotiation.
Qualcomm signed an agreement with Rostov Electrosviaz of Rostov, Russia to supply 800 MHz CDMA fixed wireless local loop infrastructure equipment and services for more than 20,000 subscribers in the Russian region of Rostov-on-Don and surrounding cities. The initial phase of this contract is valued at $5.8 million and is Qualcomm's third contract to supply CDMA systems in Russia. To support the growing Russian market, Qualcomm announced the opening of a new Moscow office.
In May, Vodafone and Qualcomm announced that a field trial would be conducted in the United Kingdom beginning in the fourth calendar quarter of this year to demonstrate a CDMA air interface integrated with a GSM network. The trial will demonstrate the use of CDMA as an alternative wireless access technology and evaluate the performance of GSM-CDMA system technology. Concurrently, Qualcomm is participating in an economic study of the hybrid system approach.Qualcomm selected CellStar Corporation, one of the world's largest phone wholesalers, to sell its full line of CDMA digital phones, including the "Q" phone, the QCP-2700 and the QCT series of fixed wireless phones. CellStar began distributing Qualcomm's phones to carriers and resellers throughout the United States beginning in June.
Sprint PCS announced the launch of its Personal Communication Services (PCS) in 23 additional U.S. cities, bringing the benefits of CDMA wireless communications to consumers and businesses in 56 cities across the nation. These recent launches complete the Nortel/Qualcomm launch phase of infrastructure for Sprint PCS, a significant achievement in only 17 months. This brings the total number to over 100 U.S. cities with commercial CDMA networks.
According to the CDMA Development Group (CDG), as of April 1997 there were more than 2.5 million CDMA subscribers worldwide with rapid growth expected to continue. The CDG announced the creation of cdmaOne®, a universal term for CDMA products and systems based on the IS-95 standard. cdmaOne will be used by nearly 50 manufacturers and 25 of the leading wireless operators around the world to define the CDMA technology advantages across all spectrum and application ranges.
Qualcomm announced plans to work with many of its licensees, worldwide standards bodies, and the CDMA Development Group to develop the next generation of wireless communications standards. This wider-band Third Generation (3G) system will provide a smooth migration path for cdmaOne carriers to deliver advanced wireless services using high burst rate communications for new wireless services. These services, such as high speed data and multimedia, will be delivered primarily via the Internet, and will be compatible with current and future cdmaOne voice and data networks.
In response to a natural disaster in Jarrell, Texas, Qualcomm and Sprint PCS partnered in a joint effort to provide CDMA PCS wireless local loop phone service as part of an ongoing disaster relief program for the state of Texas. Qualcomm donated CDMA digital phones and Sprint donated its services. This effort represents the first deployment of Qualcomm's fixed wireless phones in the United States.
Qualcomm was awarded a $275 million contract from Globalstar, L.P. for the manufacture and supply of commercial gateways for deployment in the Globalstar™ Low-Earth-Orbiting (LEO) satellite-based digital telecommunications system. The multi-year agreement could grow to approximately $600 million for Qualcomm as the Globalstar network is fully built out. In addition to the gateways, the contract provides for associated services and the supply of optional equipment to Globalstar L.P. Qualcomm expects to begin shipping its gateways in early calendar 1998.
Worldwide shipments of OmniTRACS units numbered more than 8,500 during the third quarter, and over 26,000 total units for fiscal year to date. To better serve its customers in the U.S., Mexico and the border areas, Qualcomm acquired a 49 percent equity stake and will take an active role in the management of the Corporacion Nacional de Radiodeterminacion (CNR), a Mexican corporation that has been the operator and distributor of the OmniTRACS® system in Mexico since 1992.
Notably, F.T.I., a Frederick-Thompson Company, signed a contract for 1,000 OmniTRACS units in June and Schneider National, Qualcomm's first OmniTRACS customer with over 12,000 units, renewed its contract. Other contract renewals during the quarter included John Christner Trucking, which doubled its number of trucks equipped; Metal Transportation Systems expanded its OmniTRACS-equipped fleet from 120 units to 660; and Buford Television grew its fleet from 140 to 300 equipped vehicles.
Qualcomm announced its first Internet e-mail server product, Eudora WorldMail™ server. Eudora WorldMail server is an advanced, scalable solution for small to medium businesses and departmental workgroups who are migrating to Internet-based messaging. The Company also introduced PureVoice™ voice coding technology. This plug-in allows Eudora® electronic mail users to record, send, receive and play back voice messages directly from the Eudora software interface with exceptional voice quality and fast transmission times. With 18 million users, Eudora is currently the world's most widely-used Internet e-mail solution.
In May, at a pre-game ceremony before 30,000 spectators, Qualcomm officially named Qualcomm Stadium. Under terms of an agreement between Qualcomm and the City of San Diego, Qualcomm paid the City $18 million to complete the second phase of the current stadium expansion in exchange for naming and signage rights for the next 20 years. The agreement also marked the launch of a global effort by Qualcomm to increase awareness of its products and services. Qualcomm Stadium is the home of the San Diego Padres, the San Diego Chargers and the San Diego State University Aztecs. It will also be the site of the annual Holiday Bowl and Super Bowl games in 1998.
In April, the U.S. District Court for the Southern District of California decided in Qualcomm's favor by denying a preliminary injunction and lifting a temporary restraining order requested by Motorola against the production, marketing and sales of Qualcomm's Q phone. Discovery in the case is ongoing, and Qualcomm presently anticipates that the Court will set a trial date in mid-1998.
The case between Qualcomm and Telefonaktiebolaget L.M. Ericsson and Ericsson Inc. is pending in Marshall, Texas with a trial presently anticipated in the late summer or early fall of 1998. The Ericsson Companies have filed similar claims against Qualcomm Personal Electronics (QPE) in Dallas, Texas, where the Court has set a mid-1999 trial date. A related case between OKI America, Inc. and the Ericsson Companies is pending in federal court in San Jose, Calif. A decision on Qualcomm's motion to intervene in that case is pending.
In May, Qualcomm filed a complaint in the United States District Court in San Diego seeking a judicial determination that Qualcomm does not infringe three patents held by U.S. Philips Corporation and that the patents are invalid. The dispute arose from Philips' contention that the three patents cover certain features of Qualcomm's CDMA products. Qualcomm denies that its products infringe any of the three patents. On July 7, 1997, the Court entered an order, at the parties' request, staying all proceedings until October 31, 1997.
Highlights of Financial Performance
Communication systems revenues of $419 million for the third quarter of fiscal 1997 represent continued growth in sales of CDMA phones and ASICs over the prior year. Communication systems gross profit increased to 25 percent in the third quarter, compared to 23 percent for the third quarter of fiscal 1996. The increase was primarily driven by strong ASICs sales and improved handset margins during the current quarter. Gross profit as a percentage of sales in future quarters may fluctuate due to mix of products sold, competitive pricing , new product introduction costs and other factors.
License, royalty and development fees were $48 million, or 9 percent of total revenues for the third quarter of fiscal 1997, compared to $25 million or 11 percent of total revenues for the year ago period. The Company expects to continue to experience quarterly fluctuations in license, royalty and development fees due to the variability in the amount and timing of CDMA license fees and royalties.
Contract services revenues grew to $54 million, a 54 percent increase over the fiscal 1996 third quarter revenues of $35 million. The increase in revenues is primarily attributable to the development agreement with Globalstar L.P.
Research and development expenditures during the third quarter were $65 million, or 12 percent of revenues, compared to $47 million or 20 percent of total revenues for the third quarter of fiscal 1996. The higher expenditures for the quarter were a result of the development of five new QCP phone models and the Q phone, continued infrastructure and ASICs development, and the development of a CDMA air interface for GSM networks. These efforts will continue into future periods. For the first nine months of fiscal 1997, R&D expenses were 11 percent of total revenues versus 22 percent in the same period of 1996.
Selling and marketing expenses increased over the year ago quarter from $19 million to $40 million, and remained 8 percent of total revenues. For the first nine months of fiscal 1997, selling and marketing expenses were 7 percent of total revenues versus 10 percent for the same period in 1996. The dollar increase in selling and marketing expenses for the quarter and the nine months relates to increased marketing activities both domestically and internationally as Qualcomm intensified its sales efforts for its new phone and other CDMA products.
General and administrative expenses were $26 million or 5 percent of revenues for the third quarter of fiscal 1997, compared with $14 million or 5 percent of revenues in the same period last year. For the first nine months of fiscal 1997, G&A expenses were 4 percent of total revenues versus 6 percent for the same period in 1996. The dollar increase is primarily a result of strengthening the Company's management team and legal fees associated with patent infringement litigation.
During the third quarter of fiscal 1997, Qualcomm recognized an additional $4 million pre-tax earnings in conjunction with the sale of all of the trading securities resulting from the Globalstar Telecommunications Ltd. warrants exercised in the second quarter of fiscal 1997. This is in addition to the nearly $10 million pre-tax income recognized during the second fiscal quarter of 1997 when the securities were adjusted to market price in anticipation of the sale. The Company's interest in Globalstar L.P., which is indirectly owned through certain limited partnerships, continues to be approximately 7 percent.
Interest income more than doubled in the third quarter of fiscal 1997, increasing to $12 million as a result of proceeds of a convertible preferred securities offering during the second fiscal quarter of 1997. Interest expense increased to $3 million in the third quarter of fiscal 1997, compared to approximately $1 million in the third quarter of fiscal 1996 as a result of increased bank borrowings to support the working capital needs of QPE. Distributions accrued on convertible preferred securities of $10 million for the third quarter of fiscal 1997 relate to the private placement of $660 million of 5.75 percent Trust Convertible Preferred Securities by Qualcomm in March 1997.
Consistent with the decline in handset revenues, minority interest also declined from the previous quarter to approximately $1 million. Qualcomm manufactures and sells phone products both through QPE and independently.
The Company realized an income tax benefit during the third quarter of fiscal 1997 due to the recognition of the entire deferred tax asset. This asset recognition favorably impacted earnings per share by $.10 in the current quarter, based on the estimated annual tax rate of 20 percent for the year. In future periods, the Company expects that the effective tax rate will be reflective of the tax rate of other California-based companies.
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 Eudora Pro electronic mail software, ASICs 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 involve risks and uncertainties. The Company'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: the ability to develop and introduce cost effective new products in a timely manner, avoiding delays in the commercial implementation of the Company's Code Division Multiple Access ("CDMA") technology; continued growth in the CDMA subscriber population and the scale-up and operations of CDMA systems; developments in current or future litigation; the Company's ability to effectively manage growth and the intense competition in the wireless communications industry; risks associated with vendor financing; timing and receipt of license fees and royalties; the Company's ability to successfully manufacture and sell significant quantities of CDMA infrastructure equipment on a timely basis; failure to satisfy performance obligations; 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 29, 1996 and the most recent Form 10-Qs.
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