Moody's Affirms Outlook on Qualcomm (QCOM) at Stable; Assigns 'A1' Prime-1 Short-Term Rating

Moody's Investors Service, ("Moody's") assigned an A1 Issuer rating and Prime-1 short term rating to Qualcomm Incorporated (Nasdaq: QCOM). The rating outlook is stable.

RATINGS RATIONALE

Qualcomm's A1 Issuer rating reflects the company's leading position in semiconductor technology and intellectual property that is foundational to wireless communications. With all paths from 2G to 3G and 4G using Qualcomm's patents, Moody's expects Qualcomm will average high-single digit revenue growth over the intermediate term as handset units continue to grow while other mobile devices are adopted. Device makers license Qualcomm's CDMA and OFDMA technology (about two thirds of total segment profit) and often use its semiconductors (one third of total segment profit). In addition to the strong and consistent cash flow generation, "Moody's expects Qualcomm will maintain a very strong liquidity profile and a balanced capital structure philosophy, although debt will be needed to support capital allocation," said Richard Lane.

The Prime-1 rating reflects Qualcomm's strong competitive position, projected financial performance, and very strong liquidity profile. As of December 2014, Qualcomm had cash and liquid investments of $31.6 billion, with 13% or $4.1 billion maintained domestically as compared to a minimum target of $2 billion to $4 billion of domestic cash. Moody's anticipates Qualcomm will maintain very significant and growing consolidated cash balances over the next few years.

"Similar to many technology companies, however, domestic cash uses in the form of dividends and share buybacks will likely outstrip domestic cash generation," said Lane. Moody's estimates about half of total cash flow is domestic. Qualcomm targets to return a minimum of 75% of cash flow from operations less capital expenditures, on average, in dividends and share buybacks. Over the next two years however, Qualcomm expects to exceed this target and execute against its increased share repurchase program ($15 billion).To support this more aggressive return of capital, Moody's expects Qualcomm will issue debt over time.

Commercial paper borrowings will be supported by a $4.0 billion five year credit facility that matures in February 2020. The committed bank facility has same day funding for U.S. dollar loans and is not subject to a material adverse change condition at each borrowing. There were no outstanding borrowings under the bank facility and Moody's does not expect any usage over the next twelve months. Qualcomm will maintain ample cushion under the facility's one financial covenant that requires a minimum interest coverage (EBITDA to Interest) of 3x.

Moody's projects Qualcomm will sustain strong credit metrics over the intermediate term. Over the next year, Moody's expects revenue and free cash flow will exceed $27 billion and $4 billion, respectively, and adjusted debt to EBITDA will be less than 1.5x (calculated using Moody's standard adjustments). In addition to organic product development that is supported by spending 20% of revenue on research and development, Moody's anticipates Qualcomm will continue to focus on making small acquisitions of intellectual property, with small employee bases, and little to no manufacturing, thereby minimizing integration risk. Of the 40 acquisitions over the last five years, deal sizes average under $50 million excluding its two largest (Atheros in 2011 for $3.1 billion and the pending purchase of UK-based wireless semiconductor company, CSR plc for $2.5 billion that Moody's expects will close by the end of summer 2015).

Ratings assigned:

A1 Issuer rating

Prime-1 short-term rating for commercial paper

Outlook stable

The rating outlook is stable and reflects expectations that Qualcomm will maintain its very strong and profitable global market position in CDMA and OFDMA wireless technology, sustain a strong and broad applications processor and chipset offering and product roadmap, and maintain conservative financial policies such that liquidity remains very strong and debt to EBITDA is sustained at less than 1.5 times.

The ratings could be upgraded if the company sustains its strong business execution and financial performance and commits to maintaining adjusted debt to EBITDA at less than 1x along with a very strong liquidity profile.

The rating could be downgraded if there is a sustained erosion of financial performance or competitive position which would indicate the loss of technological leadership, or if there is a departure from conservative fiscal practices to favor shareholders to the detriment of creditors, including adjusted debt to EBITDA trending toward 2x.

The principal methodology used in these ratings was Global Semiconductor Industry Methodology published in December 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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