QUALCOMM Incorporated — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended June 27, 2021; comparative periods ended June 28, 2020. Amounts are in U.S. dollars. Qualcomm reports through QCT (semiconductors), QTL (patent licensing) and QSI (strategic investments).
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $8.06B | $4.89B | $24.23B | $15.19B |
| Operating income | $2.20B | $0.78B | $6.89B | $2.80B |
| Net income | $2.03B | $0.85B | $6.25B | $2.24B |
| Diluted EPS | $1.77 | $0.74 | $5.43 | $1.95 |
| Gross margin | 58% | 57% | 57% | 57% |
- Q3 revenue rose 65% year over year and net income rose 140%. Nine-month revenue increased 60% and net income increased 179%.
- Q3 equipment and services revenue was $6.43B; licensing revenue was $1.63B. Nine-month amounts were $19.11B and $5.12B, respectively.
- QCT Q3 revenue was $6.47B, up 70%, with segment earnings before tax (EBT) of $1.80B; QTL revenue was $1.49B, up 43%, with EBT of $1.05B. QCT growth reflected stronger handset, RFFE, automotive and IoT demand, particularly for 5G. QTL benefited from higher estimated device sales and the Huawei license agreement.
- Q3 operating margin was approximately 27% versus 16% a year earlier, reflecting substantially higher revenue. Reported gross margin improved one percentage point.
- Operating cash flow for the first nine months was $9.46B, versus $4.07B a year earlier. Investing used $3.41B and financing used $5.40B. Cash and cash equivalents ended at $7.40B; cash, cash equivalents and marketable securities totaled $12.91B.
- At June 27, 2021, short-term debt was $2.05B and long-term debt was $13.70B; principal debt outstanding was $15.5B. The company had $500M of commercial paper outstanding and no revolver borrowings under its $4.5B facility. Current assets were $19.69B and current liabilities $11.46B.
Material changes and notable items
- QCT revenue growth was led by handsets, including higher chipset shipments and revenue per chipset. Nine-month handset revenue increased $4.68B year over year; RFFE increased $1.41B, IoT $1.42B and automotive $249M.
- QTL nine-month revenue increased $1.24B. Results included royalties due under the global Huawei license agreement, whereas the prior-year period included no Huawei royalties. Huawei paid the final installment under its settlement agreement after quarter-end.
- R&D expense increased $344M in Q3 and $904M over nine months, primarily due to investment in wireless and integrated-circuit technologies, including 5G and application processors, and higher share-based compensation.
- Nine-month investment and other income was $523M versus $46M. The current-year period benefited from gains on other investments; the prior-year period included substantial investment impairment losses, partly related to OneWeb.
- Operating cash flow increased with earnings and working-capital movements. Cash was also used for $2.6B of share repurchases, $2.2B of dividends, $1.46B of capital expenditures and the NUVIA acquisition, completed for $1.1B net of cash acquired.
- The company entered into multi-year supplier capacity commitments. Approximately $900M remained unpaid under these arrangements at quarter-end; Qualcomm expects higher operating cash outflows as payments are made and further commitments are entered into.
Outlook, risks and contingencies
- Management expected QCT revenue in Q4 FY2021 to remain favorably affected year over year by demand across handsets, RFFE and IoT. It expects further 5G network deployments and device launches and higher R&D spending than the prior year. The filing gives no numerical Q4 revenue or earnings guidance.
- Management said it did not then expect a significant future operating-results impact from COVID-19, while noting substantial uncertainty around the pandemic, supply chains and demand.
- Qualcomm cited semiconductor supply constraints and demand exceeding industry capacity. Supplier commitments are intended to secure supply, but missed minimum purchase volumes could trigger fees or forfeiture of advances.
- Key business risks include customer and licensee concentration, customers developing their own chips, intense competition, China exposure and U.S.-China tensions, supply constraints, cyclical demand, and execution and returns on investments in 5G, automotive and IoT.
- Legal and regulatory matters include appeals of European Commission fines, the pending Korea Supreme Court appeal concerning the KFTC decision, a further KFTC investigation concerning RFFE practices, and antitrust and consumer litigation. The company recorded liabilities of $296M and $1.2B for the two EC fines, including accrued interest and related items. It stated that other contingent losses were reasonably possible but not probable and that a possible loss range could not be reasonably estimated.
- Management stated that available liquidity, expected operating cash flow and financing activities should meet working and other capital needs for at least the next 12 months and thereafter for the foreseeable future.
Important facts for investors to verify
- Whether 5G-related handset and RFFE demand, and the strong QCT margins, persist beyond the reported quarter.
- How much supplier capacity commitments and industry constraints affect cash flow, product availability and margins.
- The durability and timing of QTL royalties, including Huawei-related revenue, license renewals and outcomes of licensing disputes.
- Developments in the EC appeals, KFTC investigations and other litigation, including any resulting payments or changes to business practices.
- Debt maturities, capital returns and the remaining $2.0B repurchase authorization, alongside acquisition and capacity-related cash requirements.