Qualcomm Incorporated (NASDAQ: QCOM) today reported its results for the second quarter of fiscal 1998. Total revenues for the period were $761 million, an increase of $175 million or 30 percent compared to total revenues of $586 million for the second quarter of fiscal 1997. Revenues for the first six months of fiscal 1998 were $1.5 billion, an increase of $572 million over total revenues of $975 million for the first six months of fiscal 1997.
Net income for the second quarter increased to $26 million or $.36 (diluted) per share compared with $17 million or $.23 (diluted) per share for the same period in fiscal 1997. Earnings per share for the current quarter includes a credit to income taxes related to Research&Development tax credits. Using the effective tax rate for the year, earnings per share would have been $.25 (diluted). Net income for the six months ended March 29, 1998 was $63 million, or $.85 (diluted) per share compared to net income of $26 million, or $.36 (diluted) per share for the same period in fiscal 1997.
"Although revenues decreased from the previous quarter, we are well-positioned to resume our revenue growth in future quarters," said Dr. Irwin Jacobs, chairman and CEO of Qualcomm. "On the product front, we announced several large phone contracts valued at over $457 million, including the first contract for Globalstar phones. We also announced our fifth-generation CDMA phone chip, which has already garnered significant interest among our customers and is expected to begin shipping by the end of this calendar year. In addition, we are deploying several infrastructure systems worldwide. On the technology front, we began the development of two major evolutionary enhancements to cdmaOne™ and completed the GSM-CDMA trial in the United Kingdom. Qualcomm continues to play a leading role as CDMA becomes the technology of choice for global wireless communications today and into the future."
As previously reported on February 5, 1998, second quarter earnings were impacted by economic conditions in South Korea. These conditions may continue and could impact earnings in the future. In addition, the Company cited lower demand for its single-mode Personal Communications Services (PCS) Q™ phones in the U.S. and South Korea and a delay in the introduction of the Company's dual-mode cellular Q phone, which is now expected to ramp production in June. During the quarter, the Company implemented a proactive program to address certain quality issues related to connectors in its QCP phone models. The Company re-worked its phone inventories, and worked with its customers to re-work their inventories according to their needs. The Company believes it has successfully resolved these issues; however, the manufacturing re-work resulted in fewer handset shipments as compared to the previous quarter.
Highlights of Financial Performance
Communications systems revenues were $626 million, an increase of $118 million or 23 percent over the second quarter in fiscal 1997, and a decrease of $51 million or 8 percent from the first quarter of fiscal 1998. The increase in communications systems revenues for the second quarter of fiscal 1998 compared to the year ago quarter was primarily attributed to increased sales of Code Division Multiple Access (CDMA) subscriber equipment; increased sales of Application Specific Integrated Circuits (ASICs); and increased revenues from international OmniTRACS system sales and messaging. Revenues from infrastructure equipment increased from the first fiscal quarter to the second fiscal quarter, although revenues were lower as compared to the year ago quarter when a substantial portion of a major infrastructure contract was recognized.
Communications systems gross margin for the second quarter was 22 percent compared to 18 percent for the year ago quarter. The decline in gross margin from 25 percent in the first fiscal quarter of 1998 was due to fewer Q phone sales and additional costs related to phone manufacturing re-work. The gross margin decline was partially offset by increased CDMA software revenues recognized during the quarter.
License, royalty and development fees for the second quarter of fiscal 1998 increased to $70 million from $29 million for the second quarter of the prior fiscal year, and from $45 million in the first fiscal quarter of 1998. Revenues for the second quarter included payments from existing and unannounced licensees.
During the second quarter of fiscal 1998, the Company determined that royalty estimates have become more reliable due to sufficient historical royalty data and availability of information on licensee subscriber activity. Therefore, in the second quarter of fiscal 1998, the Company reported actual royalties for the prior quarter and accrued estimated royalties for the current quarter. The effect of this one-time adjustment increased royalty revenues by $18 million in the second quarter of fiscal 1998. Royalty income may continue to fluctuate quarterly due to the timing and amount of sales by the Company's licensees, as well as changes in foreign currency exchange rates.
Contract services revenues totaled $65 million in the second quarter of fiscal 1998, compared to $49 million for the second quarter of fiscal 1997. The increase of $16 million for the quarter resulted primarily from the development agreement with Globalstar which has continued to ramp up since its inception in fiscal 1994.
Operating expenses, including research and development, selling and marketing and general and administrative, increased to $175 million in the second quarter of fiscal 1998 compared to $106 million for the same period last year, and $167 million for the first quarter of fiscal 1998.
Interest income was $10 million during the second quarter of fiscal 1998 compared to $7 million for the second quarter of fiscal 1997. The increase for the quarter reflects higher average cash balances in conjunction with the proceeds received from the private placement of $660 million of 5.75 percent Trust Convertible Preferred Securities during the second quarter of fiscal 1997. Distributions accrued on these securities were $10 million for the second quarter of fiscal 1998 compared to $4 million for the second quarter of fiscal 1997.
Minority interest includes the impact of restructuring Qualcomm Personal Electronics (QPE). Previously, QPE had been a design and sales venture in addition to a manufacturing venture. In an agreement signed in March of 1998, the Company and Sony agreed that QPE would become solely a manufacturing venture. In connection with that agreement, certain expenses previously included in QPE were absorbed by its parent companies during the second quarter of fiscal of 1998.
Income taxes during the second quarter of fiscal 1998 decreased $5 million compared to the second quarter of fiscal 1997. The decrease was primarily due to a revision in the estimated annual effective tax rate and an increase in certain estimated tax credits. The annualized tax rate is estimated to be 29 percent.
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 the ability to achieve revenue growth in future quarters, to develop and introduce cost effective new products in a timely manner, potential delays in the commercial implementation of the Company's 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 including those with fluctuating foreign exchange values, the Company's ability to successfully manufacture and sell significant quantities of CDMA handsets, ASICs and infrastructure equipment on a timely basis, failure to satisfy performance obligations, change in economic conditions of the various markets the Company serves, continued currency fluctuations and risk, 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-Q.
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